The Effects of Collateral on Firm Performance

Arito Ono, Koji Sakai, 功治 坂井, Iichiro Uesugi and 威一郎 植杉

No 5, Working Paper Series from Center for Interfirm Network, Institute of Economic Research, Hitotsubashi University

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.

Keywords: collateral; moral hazard; propensity score (search for similar items in EconPapers)
JEL-codes: D82 G21 G30 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2011-02
New Economics Papers: this item is included in nep-bec, nep-cta and nep-lab
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https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/18925/ifn_wp005.pdf

Related works:
Journal Article: The effects of collateral on firm performance (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:hit:cinwps:5

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