House Prices,Collateral Value And Corporate Financial Behavior

On July 1998,our government issued the "notice on deepening the urban housing system reform to speed up housing construction"(hereinafter referred to as "Notice").The notice clearly clarifies the cessation of housing distribution,and introduces of monetization of housing distribution.This marks the end of forty years' welfare housing distribution system.After the introduction of the notice,China's real estate market gradually grow,the house is priced and sold in the market,the liquidity has improved,the real estate prices growth rapidly,especially after 2003.The rapid growth in house prices has brought a lot of social problems,such as the rising cost of purchase house,the spread of real estate speculation malpractice,and the contradiction of house demolition and compensation,which caused the concern of scholars.In recent years,a large number of scholars have focus on real estate bubble,basically from the scope of macroeconomic research,only a little research links the price fluctuations with the micro enterprises behavior.In these theoretical literature,Chaney et al.(2012)suggests a "collateral channel" through which the bursting of an asset market bubble might affect the real economy: a large rising in asset markets affects the value of collaterizable assets,which increases a firm's credit worthiness and debt capacity,enhance debt capacity,in turn,leads to increased investment and output(e.g.,Bernanke and Gertler,1989;Kiyotaki and Moore,1997).Chaney et al.(2012)find that,over the 1993-2007 period,a $1 increase in collateral value leads the representative US public corporation to raise its investment by $0.06.Follow Chaney et al.(2012),many scholars explore how collateral value affects corporate financial and investment behavior by considering the exogenous variation in the market value of a firm's real estate assets caused by fluctuations in local real estate prices.Most of the literatures confirmed the effect of the collateral channel.Cvijanovi?(2014)find that the increase in collateral value caused by fluctuations in local real estate prices enhanced a firm's debt capacity.Lin(2015)find that the increase in collateral value caused by fluctuations in local real estate prices increase the ratio of bank loans to interest-bearing debt.Zeng(2012)find that the increase in collateral value caused by fluctuations in local real estate prices enhanced a firm's debt capacity and investment.The previous studies tend to emphasize the positive consequences of the increased collateral value caused by fluctuations in local real estate prices,while our article focus on the negative effects of the collateral value.The efficiency of the financial market is low,the investor protection is weak,and the corporate governance is weak too,our paper attempts to study the negative effects of the collateral value.In this paper,we make use of a novel experiment developed by Chaney et al.(2012).Specifically,we use changes in the value of a firm's collateral value caused by variations in local real estate prices as an exogenous change,explore the impact of collateral value on firm's risk-taking,cash holding and tunneling.Based on the data about Chinese non-real estate firms over period of 2003-2013,We find that:Firstly,we explore the impact of collateral value on firm's risk-taking.We find that increases in collateral values lead to lower corporate risk-taking in non-real estate firms.The rise of house price can increase corporate collateral value.Theoretically,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.Further explore find that increases in collateral values lead to more invest in investment properties.We also find that the negative relationship between the collateral value and corporate risk-taking are more pronounced in the firm with more investment properties.Secondly,we explore the impact of collateral value on cash holding.In theory,there are very different interpretations of the impact of the collateral value on corporate cash holdings.On the one hand,the increases in real estate value can enhance firms' financing capacity,reduce the possibility of financial distress.on the other hand,the investor protection of our country is very weak,the corporate agency problems are very serious,shareholders or managers tend to hold higher levels of cash.We find strong evidence that increases in real estate values lead to bigger corporate cash reserves.Next,we find that following collateral appreciation,the marginal value of cash holdings declines.Our findings lend support to agency motive.Using the separation of shareholders' ownership and control as a proxy for agency cost,we find that the relationship between collateral value and cash holding or cash value is more prominent in firms with more agency cost.Thirdly,we investigate the relationship between collateral value and tunneling.We use controlling shareholder's embezzlement of listed company's funds as a proxy for tunneling.We find that the increases in collateral values lead to more tunneling in non-real estate firms.This evidence lends support to the notion that firms with a high collateral value are better positioned to borrow money from banks and thus tunneling.This imply that the investor protection of our country is very weak,the corporate agency problems are very serious.The relationship between collateral value and tunneling are more pronounced in firms with more concentration of stockholding,less competition in the product market,less information disclosure.We follow Chaney et al.(2012)in addressing two potential endogenity concerns with this experiment:(1)real estate prices could be correlated with investment opportunities and thus firm financial behavior;(2)the decision to own or lease real estate might be correlated with firms' investment opportunities and thus firm financial behavior.To deal with the first endogenity concern,follow Adelino et al.(2015),we instrument city-level real estate prices by local housing elasticity.The intuition is that the demand for real estate increases as the local housing elasticity decreases.For a location with inelastic land supply,the decrease in interest rate will mostly translate into higher housing prices rather than more construction.We address the second source of endogenity related to ownership decision that firms are more likely to own real estate are also more sensitive to local demand shocks,by controlling for the interactions between firms' initial characteristics and the real estate price index.We also test the robustness of the results using different measures of risk taking,cash holding,tunneling.We find that our results are robust to these approaches.Our paper at least has the following contributions:Firstly,our findings provide new evidence for the research of the negative effects of the collateral value.Previous studies tend to emphasize the positive consequences of the increased collateral value.For example,Existing studies have documented an important collateral channel through which real estate price fluctuations can affect firms' debt capacity and investment.We find that real estate bubbles may have negative impacts.Firstly,we find that the increases in collateral values lead to lower corporate risk-taking in non-real estate firms.Our findings lend support to the hypothesis that non-real estate firm's managers have strong incentive to engage in bubble sectors-such as real estate investments-in order to bring high profits.However,the hollowing-out effects may have a negative impact on the production efficiency and economic growth.Secondly,we find strong evidence that increases in real estate values lead to bigger corporate cash reserves.Next,we find that following collateral appreciation,the marginal value of cash holdings declines.Our findings lend support to agency motive.This imply that the investor protection of our country is very weak,the corporate agency problems are very serious.Finally,firms with a high collateral value are better positioned to borrow money from banks and thus tunneling.Secondly,previous studies of housing price mostly focused on the macro level,such as which factors affects house price,real estate bubbles,the impact on consumption,there are very little study links price fluctuations with corporate financial behavior.We use changes in the value of a firm's collateral caused by variations in local real estate prices as an exogenous change,explore the impact of collateral value on firm's risk-taking,cash holding and tunneling,our findings enrich research on macroeconomic policies and corporate financial behaviors.Thirdly,in recent years,especially after the global financial crisis,the topic of "risk-taking" attracted attention of academics and practitioners.The managers' risk choice affect not only the firm,but also the macro economy.A branch of literature focuses on agency conflicts,such as managerial compensation(Coles et a1.,2006),investor protection(John et a1.,2008),Creditor rights(Acharya et a1.,2011).However,research on our country always focus on the perspective of property and managerial compensation.We use changes in the value of a firm's collateral caused by variations in local real estate prices as an exogenous change,explore the impact of collateral value on firm's risk-taking,expand upon risk-taking literature.Fourthly,Chen et al.(2014)take the US public firms as example,test the effects of financial flexibility on corporate cash holdings over the 1993-2007 period.Chen et al.(2014)find strong evidence that increases in real estate value lead to smaller corporate cash reserves.This imply that increases in real estate value can alleviate agency costs,enhance firms' financing capacity,increases firms' financial flexibility,reduces firms' incentive to save cash.Their findings lend support to precautionary motives.Shareholders in the U.S.enjoy good protection.Thus,shareholders in the U.S.can force managers to return excess funds to them,this may be the reason in support of the agency cost motive for cash holdings is weak on the US.Based on the data about Chinese non-real estate firms over the period of 2003-2013,We find strong evidence that increases in real estate values lead to bigger corporate cash reserves.Next,we find that following collateral appreciation,the marginal value of cash holdings declines.In our country,the invest protection and corporate governance is weak,our research can provide new evidence of cash holdings in transition countries.Finally,tunneling is a hot issue in corporate governance,based on the rising of real estate prices,we focus on the impact of the increase of collateral value on tunneling.Our finding provides new evidence for the research of tunneling.