Housing price growth and the cost of equity capital

Ding, Xiaoya (Sara), Yang Ni, Abdul Rahman and Samir Saadi

Journal of Banking & Finance, 2015, vol. 61, issue C, 283-300

Abstract: Building on recent research linking changes in housing prices to investors’ degree of risk aversion, we posit that there is a negative relation between growth in housing prices and a firm’s cost of equity capital. Consistent with our hypothesis, we find that firms located in states with positive growth rates in housing prices exhibit lower costs of equity capital. We also observe that the effect of changes in housing prices is mainly driven by smaller firms. This housing effect is not only statistically significant but also economically important. Our results hold across various measures of growth rates in housing prices and are robust to controlling for potential biases due to measurement errors in estimating the implied cost of equity capital. This study is the first to establish an association between growth rates in housing prices and firms’ cost of equity capital. It also contributes to the emerging literature on the economic importance of a firm’s geographic location.

Keywords: Implied cost of equity capital; Housing price growth; Local bias; Geographic location (search for similar items in EconPapers)
JEL-codes: G10 G11 G39 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:61:y:2015:i:c:p:283-300

DOI: 10.1016/j.jbankfin.2015.09.017

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