The Collateral Channel: How Real Estate Shocks Affect Corporate Investment

TLDR

Real‑estate price shocks influence corporate investment through a collateral channel, where firms use pledgeable assets to finance projects amid financing frictions. The study computes investment sensitivity to collateral value by treating local real‑estate price variations as shocks to firms’ collateral. The authors model collateral value shocks by applying local real‑estate price changes to firms owning real estate. During 1993–2007, a representative US corporation invested $0.06 per dollar of collateral. JEL codes: D22, G31, R30.

Abstract

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. To compute the sensitivity of investment to collateral value, we use local variations in real estate prices as shocks to the collateral value of firms that own real estate. Over the 1993–2007 period, the representative US corporation invests $0.06 out of each $1 of collateral. (JEL D22, G31, R30)