The Effects of Collateral on SME Performance in Japan
AbstractThis paper examines how collateral and personal guarantees affect firms' ex-post performance employing the 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 the following. (1) The increase in profitability and reduction in riskiness of borrowers that provide collateral to lenders are more sizeable than of borrowers that do not. (2) On the other hand, the lending attitude and monitoring frequency of borrowers' main bank do not change significantly at the time of collateral being pledged. (3) The increase in profitability of collateralized borrowers is driven by cost reductions rather than by sales growth. These findings are consistent with the hypothesis that by providing collateral, borrowers curb their own incentives for moral hazard in order to further enhance their creditworthiness.
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Bibliographic InfoPaper provided by Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University in its series PIE/CIS Discussion Paper with number 401.
Length: 39 p.
Date of creation: Sep 2008
Date of revision:
Note: This draft: September 2008; Initial draft: February 2008
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collateral; moral hazard; propensity score;
Other versions of this item:
- ONO Arito & SAKAI Koji & UESUGI Iichiro, 2008. "The Effects of Collateral on SME Performance in Japan," Discussion papers 08037, Research Institute of Economy, Trade and Industry (RIETI).
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
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