The global surge in housing prices over recent decades has made the impact of housing booms on firm innovation a key research area. However, the spillover effects of HMP, designed to regulate these booms and ensure financial stability, on firm innovation remain largely unexplored. This study addresses this gap by investigating the relationship between HMP and firm innovation in China, a country experiencing a prolonged housing boom alongside rapid R&D investment growth. Before 2014, firm innovation increased weakly while housing prices boomed. After 2015, however, R&D activity sharply increased, coinciding with fluctuating housing prices, suggesting a potential crowd-out effect of high housing prices on innovation. This paper uses a city-firm combined dataset to empirically analyze the impact of HMP on firms' R&D investments in China between 2010 and 2019, aiming to determine whether and how housing market regulation affects firm innovation activities. The findings have significant implications for understanding economic growth and achieving policy equilibrium.

Existing research extensively documents the direct impact of HMPs on housing markets, showing that these policies can reduce housing prices and curb asset bubbles. However, the literature largely overlooks the indirect effect of HMP on firm innovation. While some studies discuss the impact of real estate investment by non-financial firms, focusing on crowd-out effects (Demir, 2009; Zhu et al., 2019) or collateral effects (Chaney et al., 2012; Mao, 2021), the impact of HMP on firm innovation remains unaddressed. This study hypothesizes that HMP will positively affect firm innovation, particularly in regions with lower housing dependency and less developed financial systems. The crowd-out effect suggests that firms might prioritize higher-return housing investments over innovation, while the collateral effect suggests that real estate investment increases firms' financing capacity, boosting innovation. The authors expect that the impact of HMP on firm innovation will vary depending on the level of housing market dependence and the degree of financial development in the region.

The study uses a firm-level panel dataset from 1947 listed firms across 54 Chinese cities from 2010 to 2019, merging firm-level data with city-level HMP measures. The primary measure of firm innovation is the ratio of R&D investment to operating income. HMP is measured categorically (tightening, loosening, no change) based on changes in loan-to-value (LTV) and debt-to-income (DTI) ratios. The baseline model is estimated using OLS regression, including firm-level and city-level control variables, industry fixed effects, and year fixed effects. The natural logarithm of R&D investment is also used as an alternative measure. To address endogeneity concerns, instrumental variables (IV) regression (using residential land area as an instrument), Heckman regression, and dynamic panel models are employed. Mechanism analysis investigates the mediating roles of firm leverage and cash holdings. Finally, heterogeneity analyses explore the differing effects of HMP across cities with varying levels of housing dependency and financial development using an interaction term approach.

The core finding is that tightened HMP significantly promotes firm innovation. A tightening of HMP leads to an 8.7% increase in firms' R&D investment. The positive relationship between tightened HMP and firm innovation is robust to alternative specifications, including using the natural log of R&D investment, IV-2SLS, and Heckman regressions. Loosening HMP, conversely, negatively impacts innovation. Mechanism analysis indicates that the effect operates through two channels: reduced firm leverage and increased cash holdings. Firms with higher leverage invest less in innovation. Tightened HMP lowers leverage, freeing up resources for innovation. Similarly, higher cash holdings facilitate innovation, and tightened HMP increases cash holdings. Heterogeneity analysis reveals that the positive effect of HMP is stronger in cities with lower housing dependency and less developed financial systems. In cities with high housing dependence, HMP has limited effects due to the potential deflation of housing investment and lack of sufficient cash or collateral. In areas with less developed financial systems, tightened HMP redirects funds away from shadow banking, fostering innovation. Industry-level heterogeneity shows that the positive effect is more apparent in asset-heavy industries such as transportation and manufacturing.

These findings provide novel empirical evidence linking HMP and firm innovation, particularly in emerging markets. The positive impact of tightened HMP counters concerns that such policies might stifle economic activity. The identified mechanisms—lowering leverage and increasing cash holdings—suggest that HMP can improve firms' financial structure, indirectly boosting innovation investment. The heterogeneous effects highlight the importance of considering local context when implementing macroprudential policies. In regions heavily reliant on the housing market, the trade-off between financial stability and economic growth needs careful consideration. Conversely, in regions with underdeveloped financial systems, HMP can play a crucial role in directing funds towards productive investment, boosting innovation and alleviating financial constraints. These findings have significant implications for policymaking and inform strategic decision-making for businesses.

This study demonstrates a significant positive spillover effect of tightened HMP on firm innovation in China. The effect operates through reduced leverage and increased cash holdings, with stronger effects in cities with lower housing dependency and underdeveloped financial systems. These findings emphasize the complex interplay between macroprudential policies, firm behavior, and regional economic characteristics. Future research could explore the asymmetric effects of HMP on firm performance and investigate the interactions between macroprudential, fiscal, and monetary policies on housing markets and firm innovation.

The study focuses on China, limiting the generalizability of findings to other contexts. The use of listed firms may not fully capture the behavior of all firms. The precise measurement of HMP using categorical variables could be further refined using continuous measures. The instrumental variable used may not be completely exogenous. Further research is needed to fully understand the nuances of HMP's influence on firm innovation across different institutional settings and economic conditions.