Spillover Effects of State Regulated Corporate Disclosures on the Mortgage Market

Abstract

I investigate the spillover effects of disclosure requirements imposed by state governments on oil and gas companies operating in the state. Recently, several state governments have begun requiring companies to publicly disclose information about chemicals used in their fracking operations. The chemicals can result in land and water contamination, thereby creating uncertainty about property values near fracking operations. I hypothesize and find that the disclosure mandate reduces uncertainty about property values and subsequently increases mortgage lending activity, i.e., probability of obtaining a mortgage and loan-to-value by 2.6 and 2.2 percentage points, respectively. My analyses exploit the staggered adoption of disclosure regulations across states as well as variation in the location of properties relative to fracking wells. I conduct cross-sectional tests based on property characteristics (e.g., drinking water source, lender type) and the content of the information disclosed to further substantiate my inference that disclosures related to fracking chemicals facilitate mortgage lending activity. Finally, I find that fracking chemical disclosures decrease the variance in property prices, suggesting that a reduction in uncertainty about collateral value is the mechanism through which these disclosures affect mortgage lending. My results highlight the value of information disclosed by one sector of the economy for economic activity in different sector of the economy.