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

48 Pages Posted: 17 Dec 2018

See all articles by Denis Fougère

Denis Fougère

CNRS and SCIENCES PO PARIS; National Center for Scientific Research (CNRS); IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

Remy Lecat

Banque de France

Simon Ray

Aix-Marseille University

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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 lowest decile of the distribution but a 6% increase in the investment rate of firms belonging to the highest decile.

Keywords: firms' investment, real estate prices, collateral channel, financial contraints

JEL Classification: D22, G30, O52, R30

Suggested Citation

Fougere, Denis and Lecat, Remy and Ray, Simon, Real Estate Prices and Corporate Investment: Theory and Evidence of Heterogeneous Effects Across Firms. IZA Discussion Paper No. 12007, Available at SSRN: https://ssrn.com/abstract=3301780

Denis Fougere (Contact Author)

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National Center for Scientific Research (CNRS)

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IZA Institute of Labor Economics

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Centre for Economic Policy Research (CEPR) ( email )

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Remy Lecat

Banque de France ( email )

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Simon Ray

Aix-Marseille University ( email )

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