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

Denis Fougère (1) , Rémy Lecat (2) , Simon Ray (3)

1 OSC - Observatoire sociologique du changement (Sciences Po, CNRS)
2 Centre de recherche de la Banque de France
3 AMSE - Aix-Marseille Sciences Economiques

In this paper, we investigate the effect of real estate prices on productive investment. We build a 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. 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.

Keywords: financial constraints; Firms' investment; Real estate prices; Collateral channel; Financial constraints JEL classification: D22; G30; O52; R30

Domains: Humanities and Social Sciences; Economics and Finance

Denis Fougère, Rémy Lecat, Simon Ray. Real Estate Prices and Corporate Investment: Theory and Evidence of Heterogeneous Effects across Firms. Journal of Money, Credit and Banking, 2019, 51 (6), pp.1503-1546. ⟨10.1111/jmcb.12631⟩. ⟨hal-02274289⟩