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Are Lending Relationships Beneficial or Harmful for Public Credit Guarantees? Evidence from Japan's Emergency Credit Guarantee Program

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  • ONO Arito
  • UESUGI Iichiro
  • YASUDA Yukihiro

Abstract

This paper examines the effectiveness of Japan's Emergency Credit Guarantee (ECG) program set up during the financial turmoil following the failure of Lehman Brothers, in increasing credit availability and improving the ex-post performance of small businesses. In particular, using a unique firm-bank matched dataset, the paper examines whether lending relationships enhanced or dampened the effects of the ECG program. It is found that the ECG program significantly improved credit availability for firms using the program. However, when it is a relationship lender (main bank) that extends an ECG loan, the increased availability is partially, if not completely, offset by a decrease in non-ECG loans by the same bank. Further, propensity score matching estimations show that the ex-post performance of firms that received ECG loans from the main bank deteriorates more than that of firms that received non-ECG loans. We do not find such loan "substitution" or performance "deterioration" effects when a non-main bank extends ECG loans. Our findings suggest that close firm-bank relationships may have perverse effects on the efficacy of public credit guarantees.

Suggested Citation

  • ONO Arito & UESUGI Iichiro & YASUDA Yukihiro, 2011. "Are Lending Relationships Beneficial or Harmful for Public Credit Guarantees? Evidence from Japan's Emergency Credit Guarantee Program," Discussion papers 11035, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:11035
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    References listed on IDEAS

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    Cited by:

    1. repec:taf:oaefxx:v:3:y:2015:i:1:p:1002600 is not listed on IDEAS
    2. Ono, Arito & Uesugi, Iichiro, 2014. "SME Financing in Japan during the Global Financial Crisis: Evidence from Firm Surveys," HIT-REFINED Working Paper Series 6, Institute of Economic Research, Hitotsubashi University.
    3. Kitamura, Tomiyuki & Muto, Ichiro & Takei, Ikuo, 2016. "Loan interest rate pass-through and changes after the financial crisis: Japan’s evidence," Journal of the Japanese and International Economies, Elsevier, vol. 42(C), pages 10-30.
    4. SAITO Kuniyoshi & TSURUTA Daisuke, 2014. "Information Asymmetry in SME Credit Guarantee Schemes: Evidence from Japan," Discussion papers 14042, Research Institute of Economy, Trade and Industry (RIETI).
    5. Nobuyoshi Yamori & David McMillan, 2015. "Japanese SMEs and the credit guarantee system after the global financial crisis," Cogent Economics & Finance, Taylor & Francis Journals, vol. 3(1), pages 1002600-100, December.
    6. Ono, Arito & Sakai, Koji & Uesugi, Iichiro, 2012. "The effects of collateral on firm performance," Journal of the Japanese and International Economies, Elsevier, vol. 26(1), pages 84-109.
    7. repec:pal:compes:v:60:y:2018:i:1:d:10.1057_s41294-017-0044-2 is not listed on IDEAS
    8. Heshmati, Almas, 2013. "The Effect of Credit Guarantees on R&D Investment of SMEs in Korea," IZA Discussion Papers 7851, Institute for the Study of Labor (IZA).
    9. TSURUTA Daisuke, 2017. "Working Capital Management during the Global Financial Crisis: Evidence from Japan," Discussion papers 17045, Research Institute of Economy, Trade and Industry (RIETI).
    10. Tsuruta, Daisuke, 2015. "Bank loan availability and trade credit for small businesses during the financial crisis," The Quarterly Review of Economics and Finance, Elsevier, vol. 55(C), pages 40-52.
    11. Hyonok KIM & YASUDA Yukihiro, 2015. "Accounting Information Quality and Government Guaranteed Loans: Evidence from Japanese SMEs," Discussion papers 15138, Research Institute of Economy, Trade and Industry (RIETI).

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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