Real Estate Prices and Firm Capital Structure

Dragana Cvijanovic
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Dragana Cvijanovic: GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique, LSE - London School of Economics and Political Science

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Abstract: This paper examines the impact of real estate prices on fi rm capital structure decisions. I find that for a typical US listed company, a one percent increase in collateral value translates into a 0.12 percent increase in total leverage. My identi cation strategy employs a triple interaction of MSA level land supply elasticity, aggregate real estate price changes and a measure of a firm's real estate holdings as an exogenous source of variation in the value of fi rm collateral. I fi nd that for every one percent increase in collateral value, a fi rm's annualized cost of long-term debt drops by four basis points. More financially constrained fi rms tilt their debt structure towards arm's length fi nancing, less information sensitive debt and longer-term debt maturities in response to collateral value appreciation. These results indicate the importance of collateral values in mitigating potential informational imperfections. More financially constrained fi rms use collateral-induced borrowing proceeds for financing new investment and for equity payouts.

Keywords: collateral; debt capacity; capital structure; real estate prices (search for similar items in EconPapers)
Date: 2012-04-07
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Published in 2012

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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-00686121

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