Module 3 reading list

Housing collateral

Adelino, M., Schoar, A. and Severino, F. (2015) ‘House prices, collateral, and self-employment’, Journal of Financial Economics, 117(2), pp. 288–306.

We document the importance of the collateral lending channel for small business employment over the past decade. Small businesses in areas with greater increases in house prices experienced stronger growth in employment than large firms in the same areas and industries. To identify the role of the collateral lending channel separately from aggregate changes in demand, we show that this effect is more pronounced in industries that need little start-up capital and in which housing collateral is more important. This increase is also present in manufacturing industries, particularly those that ship goods over long distances. In aggregate, the collateral lending channel explains 15–25% of employment variation.

Davis, S.J. and Haltiwanger, J.C. (2019) ‘Dynamism Diminished: The Role of Housing Markets and Credit Conditions’. National Bureau of Economic Research (Working Paper Series).

We estimate the effects of house price changes on young-firm employment shares and industry-level employment growth in local economies. A novel test shows that house price effects on local economies work through wealth, liquidity and collateral effects on the propensity to start new firms and expand young ones. Aggregating local effects to the national level, our estimates imply that housing market ups and downs play a major role – as transmission channel and driving force – in medium-run fluctuations in young-firm employment shares in recent decades. We also find a distinct and smaller role for locally exogenous loan-supply shifts.

Jensen, T.L., Leth-Petersen, S. and Nanda, R. (2022) ‘Financing constraints, home equity and selection into entrepreneurship’, Journal of Financial Economics, 145(2, Part A), pp. 318–337.

We exploit a mortgage reform that differentially unlocked home equity across the Danish population and study how this impacted selection into entrepreneurship. We find that increased entry was concentrated among entrepreneurs whose firms were founded in industries where they had no prior work experience. In addition, we find that marginal entrants benefiting from the reform had higher pre-entry earnings and that a significant share of entrants started longer-lasting firms. Our results are most consistent with the view that housing collateral enabled high ability individuals with less-well-established track records to overcome credit rationing and start new firms, rather than just leading to ‘frivolous entry’ by those without prior industry experience.

Kerr, S.P., Kerr, W.R. and Nanda, R. (2022) ‘House prices, home equity and entrepreneurship: Evidence from U.S. census micro data’, Journal of Monetary Economics, 130, pp. 103–119.

During 1992-2007, house price growth is strongly correlated with local entrepreneurship. We show with Census Bureau data that most of this entry is related to construction and real estate; these entrants tend to be small and short-lived. Using a 1998 Texas reform that allowed home equity lending for the first time in the state, we isolate that entrepreneurship through the collateral channel [i.e., borrowing capacity] tends to be longer-lived and more balanced across sectors. The collateral channel is a tenth or less of the entry associated with house price increases, driven by a small share of homeowners who are constrained without price growth.

Schmalz, M.C., Sraer, D.A. and Thesmar, D. (2017) ‘Housing Collateral and Entrepreneurship’, The Journal of Finance, 72(1), pp. 99–132.

We show that collateral constraints restrict firm entry and postentry growth, using French administrative data and cross-sectional variation in local house-price appreciation 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 collateral 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 entry, treated entrepreneurs use more debt, start larger firms, and remain larger in the long run.


Berger, A.N. et al. (2005) ‘Does function follow organizational form? Evidence from the lending practices of large and small banks’, Journal of Financial Economics, 76(2), pp. 237–269.

Theories based on incomplete contracting suggest that small organizations may do better than large organizations in activities that require the processing of soft information. We explore this idea in the context of bank lending to small firms, an activity that is typically thought of as relying heavily on soft information. We find that large banks are less willing than small banks to lend to informationally “difficult” credits, such as firms that do not keep formal financial records. Moreover, controlling for the endogeneity of bank-firm matching, large banks lend at a greater distance, interact more impersonally with their borrowers, have shorter and less exclusive relationships, and do not alleviate credit constraints as effectively. All of this is consistent with small banks being better able to collect and act on soft information than large banks.

Black, S.E. and Strahan, P.E. (2002) ‘Entrepreneurship and bank credit availability’, The Journal of Finance, 57(6), pp. 2807–2833.

The literature is divided on the expected effects of increased competition and consolidation in the financial sector on the supply of credit to relationship borrowers. This paper tests whether policy changes fostering competition and consolidation in U.S. banking helped or harmed entrepreneurs. We find that the rate of new incorporations increases following deregulation of branching restrictions, and that deregulation reduces the negative effect of concentration on new incorporations. We also find the formation of new incorporations increases as the share of small banks decreases, suggesting that diversification benefits of size outweigh the possible comparative advantage small banks may have in forging relationships.

Cerqueiro, G. and Penas, M.F. (2017) ‘How Does Personal Bankruptcy Law Affect Startups?’, The Review of Financial Studies, 30(7), pp. 2523–2554.

We exploit state-level changes in the amount of personal wealth individuals can protect under Chapter 7 to analyze the effect of debtor protection on the financing structure and performance of a representative panel of U.S start-ups. The effect of increasing debtor protection depends on the entrepreneur’s level of wealth. Firms owned by mid-wealth entrepreneurs whose assets become fully protected suffer a reduction in credit availability, employment, operating efficiency, and survival rates. We find no such negative effects for low-wealth and high-wealth owners. Our results are consistent with theories that predict that asset protection in bankruptcy leads to a redistribution of credit.

Greenstone, M., Mas, A. and Nguyen, H.-L. (2020) ‘Do Credit Market Shocks Affect the Real Economy? Quasi-experimental Evidence from the Great Recession and “Normal” Economic Times’, American Economic Journal: Economic Policy, 12(1), pp. 200–225.

Using comprehensive data on bank lending and establishment-level outcomes from 1997–2010, this paper finds that small business lending is an unimportant determinant of small business and overall economic activity. A shift-share style research design is implemented to predict county-level lending shocks using variation in preexisting bank market shares and bank supply shifts. Counties with negative predicted lending shocks experienced declines in small business loan originations, indicating that it is costly to switch lenders. However, small business loan originations have an economically insignificant and generally statistically insignificant impact on both small firm and overall employment during the Great Recession and normal times.

Petersen, M.A. and Rajan, R.G. (1994) ‘The Benefits of Lending Relationships: Evidence from Small Business Data’, The Journal of Finance, 49(1), pp. 3–37.

This paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm. We analyze data collected in a survey of small firms by the Small Business Administration.The primary benefit of building close ties with an institutional creditor is that the availability of financing increases. We find smaller effects on the price of credit.Attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit. In sum, relationships are valuable and appear to operate more through quantities rather than prices.

Petersen, M.A. and Rajan, R.G. (2002) ‘Does Distance Still Matter? The Information Revolution in Small Business Lending’, The Journal of Finance, 57(6), pp. 2533–2570.

The distance between small firms and their lenders is increasing, and they are communicating in more impersonal ways. After documenting these systematic changes, we demonstrate they do not arise from small firms locating differently, consolidation in the banking industry, or biases in the sample. Instead, improvements in lender productivity appear to explain our findings. We also find distant firms no longer have to be the highest quality credits, indicating they have greater access to credit. The evidence indicates there has been substantial development of the financial sector, even in areas such as small business lending.

Rice, T. and Strahan, P.E. (2010) ‘Does Credit Competition Affect Small-Firm Finance?’, The Journal of Finance, 65(3), pp. 861–889.

While relaxation of geographical restrictions on bank expansion permitted banking organizations to expand across state lines, it allowed states to erect barriers to branch expansion. These differences in states’ branching restrictions affect credit supply. In states more open to branching, small firms borrow at interest rates 80 to 100 basis points lower than firms operating in less open states. Firms in open states also are more likely to borrow from banks. Despite this evidence that interstate branch openness expands credit supply, we find no effect of variation in state restrictions on branching on the amount that small firms borrow.