The Collateral Channel: How Real Estate Shocks Affect Corporate Investment

30 Pages Posted: 7 Jun 2010

See all articles by Thomas Chaney

Thomas Chaney

Toulouse School of Economics; University of Chicago - Department of Economics; Centre for Economic Policy Research (CEPR)

David Alexandre Sraer

University of California, Berkeley; Princeton University

David Thesmar

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2010

Abstract

What is the impact of real estate prices on corporate investment? In the presence of financing frictions, firms use pledgeable assets as collateral to finance new projects. Through this collateral channel, shocks to the value of real estate can have a large impact on aggregate investment. Over the 1993-2007 period, the representative U.S. corporation invests 6 cents out of each additional dollar of collateral. To compute this sensitivity, we use local variations in real estate prices as shocks to the collateral value of firms that own real estate. We address the endogeneity of local real estate prices using the interaction of interest rates and local constraints on land supply as an instrument. We address the endogeneity of the decision to own land (1) by controlling for observable determinants of ownership and (2) by looking at the investment behavior of firms before and after they acquire land. The sensitivity of investment to collateral value is stronger the more likely a firm is to be credit constrained.

Suggested Citation

Chaney, Thomas and Sraer, David Alexandre and Thesmar, David, The Collateral Channel: How Real Estate Shocks Affect Corporate Investment (June 2010). NBER Working Paper No. w16060. Available at SSRN: https://ssrn.com/abstract=1620777

Thomas Chaney (Contact Author)

Toulouse School of Economics ( email )

21 allee de Brienne
Toulouse Cedex 6, 31015
France

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

David Alexandre Sraer

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

David Thesmar

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA) ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States
16172259767 (Phone)

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