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Real Estate and Corporate Investmeent: Theory and Evidence of Heterogeneous Effects Across Firms

Denis Fougere (), Remy Lecat () and S. Ray

Working papers from Banque de France

Abstract: in this paper, we investigate the effect of real estate prices on productive investment. We build a simple theoretical framework of firms’ investment with credit rationing and real estate collateral. We show that real estate prices affect firms’ borrowing capacities through two channels. An increase in real estate prices raises the value of the firms’ pledgeable assets and mitigates the agency problem characterizing the creditor-entrepreneur relationship. It simultaneously cuts the expected profit due to the increase in the cost of inputs. While the literature only focuses on the first channel, the identification of the second channel allows for heterogeneous effects of real estate prices on investment across firms. We test our theoretical predictions using a large French database. We do find heterogeneous effects of real estate prices on productive investment depending on the position of the firms in the sectoral distributions of real estate holdings. Our preferred estimates indicate that a 10% increase in real estate prices causes a 1% decrease in the investment rate of firms in the first decile of the distribution but a 6% increase in the investment rate of firms belonging to the last decile.

Keywords: Firms’ investment; Real estate prices; Collateral channel; Financial constraints. (search for similar items in EconPapers)
JEL-codes: D22 G30 O52 R30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eur and nep-ure
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:626

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