Two-Way Fixed Effects Estimation on the Impact of rising house prices on the capital structure of real enterprises in China

Abstract

Since the implementation of China's reform and opening-up policy, rapid economic growth has led to the rapid development of the real estate market and housing prices have entered the fast lane of growth. As housing prices rise, the allocation of credit funds in China will continue to be tilted towards the real estate sector. This has a "crowding out" effect on the real economy and is not conducive to the positive optimisation of corporate capital structure. Little research exists on the lagged nature of house price inflation and its impact on the capital structure of real enterprises. To fill this gap, this paper investigates the lagged effect of house price changes on the adjustment of capital structure of real enterprises and the heterogeneity between regions based on a two-way fixed effects model with a sample of 30 Chinese provinces over the period 2000-2020. The study finds that in the short run, rising house prices do not have a significant impact on the capital structure of real enterprises. In the long run, enterprises' debt levels rise and their capital structure adjusts negatively. There is a lag in the central and western regions and no lag in the eastern regions. After a series of robustness tests, the results remain significant and robust. This study provides a reference for the government to establish a long-term mechanism for the stable development of the real estate market.