The effects of collateral on firm performance

Arito Ono, Koji Sakai and Iichiro Uesugi

Journal of the Japanese and International Economies, 2012, vol. 26, issue 1, 84-109

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 with high observed riskiness are more likely to pledge collateral. In addition, 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.

Keywords: Collateral; Moral hazard; Propensity score (search for similar items in EconPapers)
JEL-codes: D82 G21 G30 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

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Working Paper: The Effects of Collateral on Firm Performance (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jjieco:v:26:y:2012:i:1:p:84-109

DOI: 10.1016/j.jjie.2011.12.001

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