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Housing price growth and the cost of equity capital

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  • Ding, Xiaoya (Sara)
  • Ni, Yang
  • Rahman, Abdul
  • Saadi, Samir

Abstract

Building on recent research linking changes in housing prices to investors’ degree of risk aversion, we posit that there is a negative relation between growth in housing prices and a firm’s cost of equity capital. Consistent with our hypothesis, we find that firms located in states with positive growth rates in housing prices exhibit lower costs of equity capital. We also observe that the effect of changes in housing prices is mainly driven by smaller firms. This housing effect is not only statistically significant but also economically important. Our results hold across various measures of growth rates in housing prices and are robust to controlling for potential biases due to measurement errors in estimating the implied cost of equity capital. This study is the first to establish an association between growth rates in housing prices and firms’ cost of equity capital. It also contributes to the emerging literature on the economic importance of a firm’s geographic location.

Suggested Citation

  • Ding, Xiaoya (Sara) & Ni, Yang & Rahman, Abdul & Saadi, Samir, 2015. "Housing price growth and the cost of equity capital," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 283-300.
    • Handle: RePEc:eee:jbfina:v:61:y:2015:i:c:p:283-300
    DOI: 10.1016/j.jbankfin.2015.09.017
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    More about this item

    Keywords

    Implied cost of equity capital; Housing price growth; Local bias; Geographic location;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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