The impact of housing macroprudential policy on firm innovation: empirical evidence from China

The ascent of housing booms and their impact on firm innovation has become a focal point of research, fueled by the remarkable upsurge in housing prices that have been witnessed across global over the past few decades. Despite the attention given to this subject, there has been limited exploration of the spillover effects of housing macroprudential policy (HMP) on firm innovation, which aims to regulate housing booms and ensure financial stability. In this study, we examine the relationship between HMP and firm innovation using panel data from Chinese firms located in 54 cities for the period spanning 2010 to 2019. Our empirical results reveal that tightened HMP promotes firm innovation and is robust to alternative measurements, additional fixed effects, Heckman regression, and IV regression. Moreover, our mechanism analysis demonstrates that HMP promotes firm innovation by reducing leverage and encouraging cash holdings. Further examination of city-level heterogeneity suggests that firms located in areas with lower housing dependency and limited financial development benefit more from HMP's positive-effect on firm innovation. This paper contributes to the gap in the existing literature that neglects the spillover effect of HMP on firms' innovation activities. Our findings also provide practical implications for both policymakers and businesses.

Mengtao Chen, Haojie Zhu, Yongming Sun, Ruoxi Jin