Chengzi Yi (European University Institute) - Collateral Constraints and Asset Composition

BOFIT seminars

BOFIT seminar - Chengzi Yi (European University Institute) - Collateral Constraints and Asset Composition

Abstract
This paper investigates how collateral constraints influence firms’ investment allocation between real estate and non-real estate capital. I develop a model that incorporates adjustment costs and collateral constraints, where capital assets differ in both adjustment costs and pledgeability. Using data from Chinese listed firms, I estimate the model and demonstrate that financial frictions and adjustment costs play critical roles in shaping firms’ capital investment behavior. The model explains the observed high proportion of real estate in firms’ capital composition, especially for smaller firms. Introducing collateral constraints improves the model’s fit to the data. The estimation results indicate significantly higher fixed costs for adjusting real estate capital and greater pledgeability of real estate assets. Removing financial frictions leads to lower aggregate capital and revenue due to zero collateral value and reduced capital investments, whereas eliminating both frictions increases them. Real estate crises, where real estate becomes unpledgeable, can distort firms’ investment decisions and overall economic output, resulting in a 4.6% decrease in aggregate revenue-based total factor productivity and a 0.3% reduction in aggregate revenue.

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