The Unintended Consequence of Collateral-based Financing: Evidence from Corporate Cost Behavior

This paper examines how real estate appreciation correspondingly changes collateral value, which affects debt structure choices and consequent operating decisions. Specifically, we explore whether collateral-based financing provides a link between real estate values and corporate cost behavior. Our baseline results show that an appreciation of a firm's real estate assets alleviates its cost stickiness. A further analysis shows that this influence is stronger for firms with less prior bank debt, less dependence on external financing, and a lower leverage ratio. We also observe that the impact of collateral shocks on cost stickiness is more pronounced when selling, general and administrative (SG&A) costs create less future value for mature firms and for firms with weaker external gover-nance. Collectively, our results support the argument that an increase in bank debt arising from collateral value appreciation mitigates agency problems and thus lessens cost stickiness.(c) 2022 Elsevier Ltd. All rights reserved.