The Effect of Real Estate Prices on Peer Firms

Abstract

We investigate peer effects from corporate real estate. Shocks to real estate prices shift firms' debt capacity, which has a significant impact not only on firm investment but also on the investment of peer firms. This peer effect from corporate real estate is stronger when firms or their peers have more investment opportunities; financially constrained firms invest more out of their own price shocks, while the peer effect is stronger for unconstrained firms; and we find significant peer effects within groups of small and large firms, respectively. Firms finance additional investment from peer real estate shocks using cash reserves. Overall, we document a new channel through which real estate is an economically significant determinant of corporate investment.

Keywords: Real estate, collateral, peer effects, corporate investment, financial flexibility