Do Real Estate Values Boost Corporate Borrowing? Evidence from Contract-Level Data
Posted: 28 Dec 2020
Date Written: October 25, 2020
Ample literature builds on the notion that rising real estate values boost corporate secured borrowing ("collateral channel"). A new contract-level database allows us to observe the value, location, age, and end-use of firms' real estate holdings and all debts raised against those assets. Firms take on new debt following an increase in the value of their real estate, but do so via unsecured debt, rather than mortgages or any other form of secured borrowing. We rationalize these findings with a model showing that a firm's choice between secured and unsecured debt hinges on the relative risk exposures of the assets on its balance sheet. An increase in real estate assets enhances firm value and overall borrowing capacity. As we demonstrate, however, real estate assets have a higher exposure to systematic risk than other corporate assets, and the wider this risk gap, the higher a firm's propensity to raise unsecured debt following an appreciation of its real estate. Our analysis adds critical new insight into how firms set their debt structure.
Keywords: Collateral, capital structure, corporate real estate, investment, asset risk
JEL Classification: D22, G32, G33, K12, R30
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