Housing Collateral Value And Corporate Investment

The fast growing housing price in China after financial crisis draws the attention of both scholars and policy makers. Real estate is the pillar industry in China; it represented large part of GDP after the large-scale 1998 housing reform in China. So it is important to do research about the microscopic transmission effects of real estate value in China. Based on the theory of real estate collateral value, this study explores how the collateral value of the real estate influence firm’s new investment, investment structure and investment efficiency. This study merges the housing collateral data at firms’ level with housing price at both provinces and cities level during the period from 2003 to 2013. Moreover, this study explore the effect of firm’s property, industry characteristics, financial development and local government land financing on the mechnisim between housing collateral value and corporate investment. As we all know, housing market is largely controlled by Chinese Government. This study further evaluates the impact of housing purchase restriction policy. As a result, this study find the evidence of collateral channel effect on firm’s investment activity but that not be affected by the housing purchase restriction policy. The details of the study as follows,Firstly, the study find that the housing collateral decrease the asymmetric information between enterprise and bank with the increasing housing price in China. The higher the real estate collateral value of corporate, the more the corporate can borrow and invest. Considering the endogenity between housing price and firm’s investment, this study construct the instrument variable by using the interaction between undeveloped land ratio and unmarried male ratio.Furthermore, this study carrys out a set of robustness test to confirm the empirical results.Secondly, this study separates the investment into housing investment and innovation investment. The increasing value of housing collateral changes the firm’s investment structure. Firm invest more in real estate industry but not in innovation investment.The change of firm’s investment structure results in the firms’ overinvestment and low investment efficiency.Thirdly, this study separates the firms into state-owned enterprise and non-state owned enterprise. This study finds that the non-state owned enterpirse invest more in real estate industry when they are in industries with high external financial dependence, or in cities with low financial development and high governmental land financing reliance but invest more in innovation activity when they are in industries with low external financial dependence, or in cities with high financial development and low governmental land financing reliance. The change of firms’ investment structure results in the big gap between non-state owned enterprise and state owned enterprise, because they are in industries with high external financial dependence or in cities with low financial development and high land finance reliance.Lastly, in 2010, a housing purchase restriction policy was announced by China’s central government and implemented gradually by several prefecture governments. This study investigates this policy’s effect on the collateral value on firm’s investment activity. Using a difference-in-difference(DID) framework, this study find the housing purchase restriction policy has no effect on firm’s new investment but decrease the percentage of housing investment. And the policy does not help improve the firm’s investment efficiency.Overall, this study contributes to the previouse research of collateral value of house. And it indicates the negative effect of collaterals price transmission mechanism. This study helps us understand the Chinese real estate markets and related policy better. And these findings should be interest to domestic and international investors and provide empirical evidences for Chinse policy makers to design the efficient financing system in China.