Essays in Corporate Finance

van Straelen, Eileen Driscoll

doi:https://doi.org/10.21985/n2-4d6b-vz13

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Essays in Corporate Finance

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This dissertation is a wide-ranging study on real estate and the effect of financial constraints on economic activity. In the first chapter, I use granular data on home builder housing developments to provide new evidence that firms spread negative revenue shocks across projects via their internal capital markets. I analyze this question in the context of the 2006-2009 housing crisis. I show that home builders who experience large asset write-downs in one area, subsequently sell homes in unaffected, healthy housing areas at a discount, in order to raise cash quickly. In response to a 10\% decline in the value of distant projects, builders cut prices of homes in unaffected counties by 2.2\%. Consistent with the theory of internal capital markets, financially constrained firms are more likely to cut prices of homes in healthy areas in response to losses in unhealthy ones. I also find that firms smooth shocks across projects only during the crisis and not during the boom. Lastly, I show that when builders cut prices they also sell homes more quickly. These results suggest an important role for firm internal capital markets in spreading negative economic shocks across space. In the second chapter, Efraim Benmelech and I test the effect of politicians on house prices using a unique dataset of housing sales merged to politicians' residences and time in office. To address the likelihood that politicians will tend to live in growing home price areas, we separate politicians who move into neighborhoods from current residents who win elections, and identify the effect from current residents only. We find that house prices increase 1.4\% in a zipcode when a resident wins an election. Politicians may influence surrounding home values via several channels. One way this could occur is through corrupt use of public resources for the politicians' personal benefit. For example, if politicians assign more police officers to patrol their own block, then house prices near a politician's home will be higher. Alternatively, politicians may target public goods to their local district in hopes of ensuring reelection, or residents may derive utility from living close to a famous or well-protected person. To distinguish between the possible channels driving the home price response, we gather data on local public goods. We find that crime rates fall in a zipcode by 1.9\% when a resident wins an election. Our results suggest that politicians cause their neighbors' home values to rise via re-directed public services. In the third chapter, I study the effect of the collapse of the asset backed securities market on student enrollment. The high cost of college has led students to increasingly finance undergraduate education with a combination of federal and private student loans. Private student loans are financed by both bank and non-bank lenders. Non-bank private lenders, such as Sallie Mae, raised capital for student loans by issuing asset backed securities. When the housing crisis led to the collapse of the Asset Backed Securities (ABS) market in 2007, non-bank private student lenders were forced to curtail lending due to lack of financing. This paper investigates the effect of this contraction on enrollment outcomes. In particular, I investigate the effect amongst the schools whose students were most dependent on private loans: selective colleges and for-profit universities. To determine the effect on enrollment outcomes, I exploit geographic variation in dependence on non-bank financing before the crisis. I find that test scores at selective colleges more exposed to the ABS collapse decline during the crisis, as high ability financially constrained students chose to attend less expensive schools. I further find that tuition declines at for-profit schools more exposed to the ABS collapse. These results suggest that the contraction in the ABS market led students to alter their enrollment decisions, having a long-lasting impact on human capital accumulation.

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