Housing Collateral and Entrepreneurship

• Published date: 01 February 2017
• Author: DAVID A. SRAER,MARTIN C. SCHMALZ,DAVID THESMAR
• DOI: http://doi.org/10.1111/jofi.12468
• Date: 01 February 2017

THE JOURNAL OF FINANCE •VOL. LXXII, NO. 1 •FEBRUARY 2017

Housing Collateral and Entrepreneurship

MARTIN C. SCHMALZ, DAVID A. SRAER, and DAVID THESMAR∗

ABSTRACT

We show that collateral constraints restrict firm entry and postentry growth, using

French administrative data and cross-sectional variation in local house-price appreci-

ation as shocks to collateral values. We control for local demand shocks by comparing

treated homeowners to controls in the same region that do not experience collat-

eral shocks: renters and homeowners with an outstanding mortgage, who (in France)

cannot take out a second mortgage. In both comparisons, an increase in collateral

value leads to a higher probability of becoming an entrepreneur. Conditional on en-

try,treated entrepreneurs use more debt, start larger firms, and remain larger in the

long run.

THIS PAPER PROVIDES EVIDENCE that entrepreneurs face credit constraints that

restrict firm creation and postentry growth, even over the long run. Exist-

ing literature documents a strong correlation between entrepreneurial wealth

and the propensity to start or keep a business (Evans and Jovanovic (1989),

Evans and Leighton (1989), Holtz-Eakin, Joulfaian, and Rosen (1993)). How-

ever, whether such a correlation constitutes evidence of financial constraints is

an open question. For example, individuals who experience a wealth increase

through inheritance are more likely to start a firm, but they may also have

greater access to business opportunities for reasons unrelated to their wealth

(Hurst and Lusardi (2004)). Whether financing constraints significantly limit

firm creation and growth has important policy implications: many public pro-

grams, such as the 7a loan program from the Small Business Administration,

subsidize small business lending based on the premise that young firms are, in

fact, financially constrained.

∗Martin C. Schmalz is with the Stephen M. Ross School of Business, University of Michigan.

David A. Sraer is with UC Berkeley. David Thesmar is with HEC Paris and CEPR. For helpful

comments and discussions, we would like to thank Sugato Bhattacharyya, Markus Brunnermeier,

Denis Gromb, Michael Roberts (the Editor), Antoinette Schoar, Jos´

e Scheinkman, Philip Stra-

han, two anonymous referees, as well as seminar participants at the University of Califonia at

Berkeley’s Department of Economics, Berkeley Haas, LSE FMG, LBS, YaleSOM, Brown Univer-

sity, Wharton Real Estate, IDC, University of Michigan, University of Amsterdam, University of

Wisconsin–Madison, University of Virginia, Harvard Business School, Kellogg School of Manage-

ment, World Bank, 10th Annual Corporate Finance Conference at Olin Business School, 2014CICF

(Chengdu), and CEPR European Workshop on Entrepreneurship Economics. Schmalz is grateful

for generous financial support through an NTT Fellowship from the Mitsui Life Financial Center.

Thesmar thanks the HEC foundation. This project uses French administrative data available from

Centre d’Acc`

es `

a Distance under agreement CRECONT. We thank Thorsten Martin for his valu-

able research assistance. All of the authors have read the Journal of Finance’s disclosure policy

and have no conflicts of interest to disclose. All errors are our own.

DOI: 10.1111/jofi.12468

99

100 The Journal of Finance R

To contribute to this debate, we use variation in house prices across French

regions together with administrative microlevel data on individual homeown-

ership and entrepreneurial outcomes.1Our methodology follows Chaney,Sraer,

and Thesmar (2012) and is akin to a difference-in-differences strategy. Specifi-

cally,we compare the entrepreneurial outcomes of individuals who own a house

and individuals who rent a house within the same region, and then relate this

difference to the house-price dynamics observed across 25 sample regions. Un-

derlying our identification strategy is the idea that when house prices rise,

homeowners experience an increase in the value of the collateral available to

start a business. In this context, renters in the same region serve as a useful

benchmark because they face the same investment opportunities and demand

shocks as homeowners. Thus, within-region comparison of entrepreneurial out-

comes across homeowners and renters allows us to difference out local economic

shocks that may drive both house prices and the creation of local businesses.

We consider the extensive margin (i.e., entry decisions) and the inten-

sive margin (i.e., postentry growth and survival conditional on entry) of en-

trepreneurship as outcome variables. To quantify the effect of collateral shocks

on households’ propensity to start a business, we use the French labor force

survey (LFS), a rotating panel that tracks randomly selected households for

three consecutive years and contains information on homeownership, location,

and occupational choice. We find that homeowners located in regions where

house prices appreciate more are significantly more likely to create businesses

than renters in the same regions. The effect is economically sizable: going from

the 25th to the 75th percentile of the distribution of past house-price growth in-

creases the probability of firm creation by homeowners, relative to renters, by

11% in the most saturated specification. This effect is larger for poorer home-

owners, whose debt capacity is more likely to depend on collateral value, and

for homeowners with larger houses, for whom a given rate of growth in house

prices leads to a larger increase in collateral value.

One possible concern with our methodology is that renters are not an ad-

equate control group because they are too different from owners. To address

this concern, we split the group of homeowners into “full” and “partial” owners,

where partial owners are homeowners who still have a mortgage outstanding

on their house, while full owners own their houses outright. Both categories of

households face the same exposure to real estate prices, but only full owners

can pledge their houses as collateral to obtain business loans. As we docu-

ment in Section I, home equity withdrawals and second lien loans are very

rare in France (IMF (2008)), and thus it is almost impossible for partial own-

ers to extract capital gains from their houses. Consistent with these observa-

tions, we find that the collateral effect is indeed driven entirely by full owners.

Specifically, relative to renters, partial owners are not significantly more likely

to start a business when house prices increase, while for full owners, a one-

interquartile-range increase in past house-price growth leads to a significant

28% increase in the probability of starting a new business. Given that partial

1We refer to all owners of newly registered businesses as “entrepreneurs.”

Housing Collateral and Entrepreneurship 101

and full owners experience the same wealth shock, our findings are unlikely to

be driven solely by a decrease in risk aversion or an increased preference for

being “one’s own boss” (Hurst and Lusardi (2004)). The comparison of full and

partial owners also mitigates concerns that the exposure of renters to house-

price growth drives our main results: renters and partial owners have opposite

exposures to house price changes, but both react in a similar way (i.e., not at

all) to changes in past house prices with respect to their choice of becoming an

entrepreneur.

We next investigate whether, conditional on entry, variation in collateral

value affects size at creation, postentry growth, and survival. To this end,

we use a detailed survey on a large cross section of French entrepreneurs who

registered a business in 1998. We merge this data set with firm-level accounting

data from tax files for up to eight years following the creation of the new firm. We

find that, in regions with greater house-price growth in the early 1990s, firms

started in 1998 by homeowners are significantly larger at the time of creation

than firms started by renters. “Treated” firms with higher owner collateral

also use more debt and create more value-added.2These effects are robust to

controlling for a large set of individual characteristics. Moreover, consistent

with the collateral channel hypothesis, these effects are more pronounced for

entrepreneurs starting businesses in industries in which credit constraints at

creation are more prevalent. Importantly,these effects are also persistent: firms

started by entrepreneurs with lower collateral in 1998 remain significantly

smaller in terms of assets, sales, and employment until the last year in our

data (2006). Finally, the documented effects are economically large: going from

the 25th to the 75th percentile of house-price growth in the five years preceding

creation allows homeowners to create firms that are 13% larger in terms of

total assets.

In a third set of analyses, we investigate the importance of the collateral

channel for firm creation in the aggregate. We find that total firm creation at

the regional level is more highly correlated with house prices in regions where

the fraction of homeowners is larger. This result confirms that the net effect of

house-price shocks on entrepreneurship across homeowners and renters is pos-

itive at the regional level: following an increase in house prices, firms created

by homeowners do not fully crowd out firms that renters may have started in

the same region.

This paper contributes to the literature on financing constraints and en-

trepreneurship. Extant literature focuses on the link between entrepreneurial

wealth and firm creation, growth, or survival. Hurst and Lusardi (2004),

Adelino, Schoar,and Severino (2013), and Corradin and Popov (2015) are closest

to our paper. We complement these papers in two ways. First, the information

on individual homeownership allows us to control for local economic shocks

that might create a spurious correlation between the entrepreneurial rate and

local house prices, thus improving identification, and the comparison of full

2We also find that total factor productivity (TFP) is not smaller and that labor productivity is

higher.