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The Effects of Collateral on Firm Performance

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  • Ono, Arito
  • Sakai, Koji
  • Uesugi, Iichiro

Abstract

This paper examines how collateral and personal guarantees affect firms’ ex-post performance employing a propensity score matching estimation approach. Based on a unique firm-level panel data set of more than 500 small-and-medium-sized borrower firms in Japan, we find that borrowers that provide collateral to lenders experience larger increases in profitability and reductions in riskiness than borrowers that do not. The main channel through which the borrower enhances its profitability is cost-cutting restructuring. These findings are consistent with the hypothesis that collateral reduces moral hazard by providing borrowers with an incentive to enhance their creditworthiness. We find little evidence that improvements in collateralized firms’ performance are driven by the intensified monitoring on the part of lenders, or by borrowing firms’ access to larger amounts of credit.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/18925/1/ifn_wp005.pdf
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Bibliographic Info

Paper provided by Center for Interfirm Network, Institute of Economic Research, Hitotsubashi University in its series Working Paper Series with number 5.

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Length: 53 p.
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:hit:cinwps:5

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Keywords: collateral; moral hazard; propensity score;

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