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By Thomas Chaney, David Sraer and David Thesmar


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 real estate shocks 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 by (1) controlling for observable determinants of ownership and (2) looking at the investment 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. We interpret these results in the light of a dynamic model of investment under financing constraints

Year: 2008
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