Abstract
The collateral channel literature predicts that firms owning more real estate use more debt when real estate prices increase. We show that the positive collateral-investment relationship is enhanced with the corporate governance of firms. Firms’ choice of debt over equity in their capital structure decisions is dependent on anti-takeover threats facing managers. During the real estate booms from 1993 to 2006, firms with strong corporate governance are more likely to increase debt capacity via the collateral channel. Entrenched managers use less debt to finance their investments when their real estate collateral values increase. Our results hold after controlling for non-collateral debts and credit rating of sample firms.
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