Real Estate Prices and Firm Capital Structure

Dragana Cvijanovic (1, 2)

1 GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC
2 LSE - London School of Economics and Political Science

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

Dragana Cvijanovic. Real Estate Prices and Firm Capital Structure. 2012. ⟨hal-00686121⟩