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

Author

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  • Fougère, Denis

    (Sciences Po, Paris)

  • Lecat, Rémy

    (Banque de France)

  • Ray, Simon

    (Banque de France)

Abstract

In this paper, we investigate the effect of real estate prices on productive investment. We build a simple 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. While the literature only focuses on the first channel, the identification of the second channel allows for heterogeneous effects of real estate prices on investment across firms. 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. Our preferred estimates indicate that a 10% increase in real estate prices causes a 1% decrease in the investment rate of firms in the lowest decile of the distribution but a 6% increase in the investment rate of firms belonging to the highest decile.

Suggested Citation

  • Fougère, Denis & Lecat, Rémy & Ray, Simon, 2018. "Real Estate Prices and Corporate Investment: Theory and Evidence of Heterogeneous Effects across Firms," IZA Discussion Papers 12007, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp12007
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    Cited by:

    1. Etienne de L'Estoile & Mathilde Salin, 2024. "Who Takes the Land? Quantifying the Use of Built-Up Land by French Economic Sectors to Assess Their Vulnerability to the ‘No Net Land Take’ Policy," Working papers 941, Banque de France.
    2. Antonin Bergeaud & Simon Ray, 2021. "Adjustment Costs and Factor Demand: New Evidence from Firms’ Real Estate [The heterogeneous impact of market size on innovation: evidence from French firm-level exports]," The Economic Journal, Royal Economic Society, vol. 131(633), pages 70-100.
    3. Bergeaud, Antonin & Eyméoud, Jean-Benoît & Garcia, Thomas & Henricot, Dorian, 2023. "Working from home and corporate real estate," Regional Science and Urban Economics, Elsevier, vol. 99(C).
    4. Antonin Bergeaud & Jean-Benoît Eymeoud & Thomas Garcia & Dorian Henricot, 2022. "Working From Home and Corporate Real Estate," Post-Print hal-03548889, HAL.
    5. Thomas Grjebine & Jérôme Héricourt & Fabien Tripier, 2023. "Sectoral reallocations, real estate shocks, and productivity divergence in Europe," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 159(1), pages 101-132, February.
    6. Yousef Ibrahim, 2019. "The Determinants of Capital Structure: Evidence from GCC and UK Real Estate Sectors," Real Estate Management and Valuation, Sciendo, vol. 27(2), pages 108-125, June.
    7. Antonin Bergeaud & Jean Benoit Eymeoud & Thomas Garcia & Dorian Henricot, 2022. "Working from home and corporate real estate," CEP Discussion Papers dp1831, Centre for Economic Performance, LSE.
    8. Bergeaud Antonin & Ray Simon, 2020. "The macroeconomics of teleworking [Macroéconomie du télétravail]," Bulletin de la Banque de France, Banque de France, issue 231.
    9. Denis FOUGERE & Rémy LECAT & Simon RAY, 2018. "Does all firms’ productive investment benefit from real estate price increases?," Rue de la Banque, Banque de France, issue 69, October.
    10. Paul Bouche & Gilbert Cette & Rémy Lecat, 2021. "News from the Frontier: Increased Productivity Dispersion across Firms and Factor Reallocation," Review of Economics and Institutions, Università di Perugia, vol. 12(2).

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    More about this item

    Keywords

    firms' investment; real estate prices; collateral channel; financial contraints;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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