Do Real Estate Values Boost Corporate Borrowing? Evidence from Contract-Level Data

Posted: 28 Dec 2020

See all articles by Murillo Campello

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Robert A. Connolly

Miami Herbert Business School - Department of Finance

Gaurav Kankanhalli

University of Pittsburgh - Katz Graduate School of Business

Eva Steiner

Penn State Smeal College of Business

Date Written: October 25, 2020

Abstract

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

Suggested Citation

Campello, Murillo and Connolly, Robert A. and Kankanhalli, Gaurav and Steiner, Eva Maria, Do Real Estate Values Boost Corporate Borrowing? Evidence from Contract-Level Data (October 25, 2020). Available at SSRN: https://ssrn.com/abstract=3718667

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138

Robert A. Connolly

Miami Herbert Business School - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

HOME PAGE: http://https://drbobconnolly.com/

Gaurav Kankanhalli

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Eva Maria Steiner (Contact Author)

Penn State Smeal College of Business ( email )

University Park, PA 16802
United States

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