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The Role of Collateral and Personal Guarantees in Relationship Lending: Evidence from Japan's SME Loan Market

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  • Ono, Arito
  • Uesugi, Iichiro

Abstract

This paper investigates the determinants of the use of collateral and personal guarantees in, Japan's SME loan market. We find that firms' riskiness does not have a significant effect on the, likelihood that collateral is used. We find, however, that main banks whose claims are collateralized, monitor borrowers more intensively, and that borrowers who have a long-term relationship with, their main banks are more likely to pledge collateral. These findings are consistent with the theory, that the use of collateral is effective in raising the bank's seniority and enhances its screening and, monitoring. This incentive effect for the bank becomes tenuous for personal guarantees.

Suggested Citation

  • Ono, Arito & Uesugi, Iichiro, 2008. "The Role of Collateral and Personal Guarantees in Relationship Lending: Evidence from Japan's SME Loan Market," PIE/CIS Discussion Paper 371, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hit:piecis:371
    Note: This draft: March 2008; First draft: August 2006
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    More about this item

    Keywords

    collateral; personal guarantees; relationship lending; SME;
    All these keywords.

    JEL classification:

    • 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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