Financial frictions, real estate collateral and small firm activity in Europe

Abstract

We investigate the importance of housing-based collateral for small and young – i.e. credit constrained – firms across six European economies. We find that borrowing, investment, and employment are all more strongly correlated with house price growth in these small and young firms, compared with slightly larger or older firms. This effect is on average stronger in the boom years, before the global financial crisis, and more pronounced in countries with more lengthy bankruptcy resolution procedures.