HEC Research Papers Series,
HEC Paris

Abstract: This paper shows that collateral constraints restrict firm entry and post-entry growth, even in the long-run. The authors' empirical strategy uses French administrative data and exploits cross-sectional variation in local house-price appreciation as shocks to the value of collateral available to homeowners. They control for local demand shocks by comparing homeowners to two control groups that live in the same region but do not experience collateral shocks: (i) renters and (ii) homeowners with a mortgage outstanding, who -- in France -- cannot take out a second mortgage on their house. In both comparisons, the authors find that an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, entrepreneurs with access to more valuable collateral start larger firms, use more debt, and create more value added, for at least six years after creation.

Keywords: Collateral; Entrepreneurship; Real estate

JEL-codes: L26

73 pages, December 20, 2014

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