Real Estate Prices and Firm Capital Structure

Abstract

This paper examines the impact of real estate prices on firm capital structure decisions. For a typical U.S. listed company, a one-standard-deviation increase in predicted value of firm pledgeable collateral translates into a 3 percentage points increase in firm leverage ratio. The identification strategy employs a triple interaction of MSA-level land supply elasticity, real estate prices, and a measure of a firm's real estate holdings as an exogenous source of variation in firm collateral values. Firms significantly change their debt structure in response to collateral value appreciation. The results indicate the importance of collateral values in mitigating potential informational imperfections.