Real estate prices and corporate borrowing: evidence from Turkey

Abstract

This thesis examines the relationship between the capital structures of firms in Turkey and their collateral values, particularly through real estate assets. Using a rich dataset, including private SMEs, it investigates whether fluctuations in local real estate prices, which are used for measuring the changes in the value of firms’ real estate holdings, affect firms’ leverage. When firms’ exposure to real estate prices is defined based on initial real estate ownership status, assumed to be identical across owner firms and fixed over time, the findings show that price increases are associated with higher long-term debt among owners compared to non-owners. Also, when ownership status is allowed to vary over time, by still assuming all owners have the same degree of exposure, the findings continue to show positive effects on leverage. These effects also extend to short-term borrowing. However, when firms differ in their exposure based on the amount of real estate assets they own, the relationship between real estate values and leverage reverses. In this case, firms with more real estate assets are more likely to reduce both short and long-term debt when prices rise. These findings suggest that the relationship is highly shaped by the degree of firms’ exposure to the real estate market.