Collateral and the Choice Between Bank Debt and Public Debt

Abstract

T his paper tests how collateral value affects a firm's choice between bank debt and public debt by considering the exogenous variation in the market value of a firm's real-estate assets caused by fluctuations in local real-estate prices. Using local land supply elasticities as an instrument for local real-estate prices, I estimate that a one-standard-deviation increase in collateral value causes bank debt as a fraction of total debt to increase by six percentage points.

Collateral Values and Corporate Employment

“…This sizable response results from changes in the number of employees, as opposed to adjustments in the average wage. Consistent with prior empirical research (e.g., Cvijanović, 2014;Lin, 2015), we show this additional hiring is funded through debt issues and the effects are stronger for firms likely to be financially constrained. Crucially, our findings hold when we focus our attention on industries least likely to be influenced by local demand shocks, including manufacturers and firms in tradable industries.…”

“…Other papers using this approach includeAdelino et al (2015),Chaney et al (2012),Cvijanović (2014),Giroud and Mueller (2015b),Lin (2015), andSchmalz et al (2015).12 This intuition is consistent with empirical evidence from the house price booms of the 1980s(Glaeser et al, 2008), as well as the most recent episode(Mian and Sufi, 2011).…”

“…This approach has recently become standard in the empirical finance literature. SeeAdelino et al (2015),Cvijanović (2014),Giroud and Mueller (2015b),Lin (2015),Schmalz et al (2015) for other applications.5 A second identification concern is that firms that choosing to purchase real estate may be more responsive to local economic conditions. We describe this issue and how we tackle it in Section 2.3.…”

“…We show a positive impact of real estate collateral values on long-term debt issuance and repayment consistent with utilization of greater debt capacity. For more detailed evidence on how these firms adjust leverage and debt contracting, seeCvijanović (2014) andLin (2015).…”

Managing innovation: The role of collateral

“…Finally, this paper is related to the literature that investigates the impact of real estate on real margins such as financial contracts (Bemelech et al (2005)), capital expenditure (Gan (2007), Chaney et al (2012)), financial margins such as leverage (e.g. Cvijanovic (2014), Lin (2014, Mian and Sufi (2011)), capital structure (Rampini and Viswanthan (2013)), cash holdings (Chen, Harford, and Lin (2013)), entrepreneurship (Adelino, Schoar, and Severino (2014)), innovation outcome (Cao et al (2014)), and others. This paper contributes to this line of studies by examining a firm's resource allocation as a response to shocks from the commercial real estate market through the lens of three innovation channels.…”