House Prices, Collateral Value and Corporate Risk-taking
LIU Hang, JIAN Lei, LIANG Juan
School of Accountancy / China Internal Control Research Center, Dongbei University of Finance and Economics; School of Accountancy, Central University of Finance and Economics
Abstract:
We investigate the effect of collateral value on firms’ risk-taking by using the exogenous variation in the market value of a firm’s real estate assets caused by fluctuations of the local real estate prices. The rise of house price can increase corporate collateral value. Theoretically, on one hand, managers would allocate the resources resulting from the increasing of collateral value into projects of bubble industries (e.g. the real estate industry) that can make high profit in the short run. This could ultimately decrease corporate risk-taking. On the other hand, the increasing of collateral value can relax firms’ financial constraints. This could in turn lead to more investment in projects with high risks as well as positive profit, and ultimately result in higher corporate risk-taking. Our empirical findings lend support to the first hypothesis. Further analysis indicates that firms put resources into real estate industry is the reason of above conclusion. Our results still hold after a series of robustness checks.
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