Investment Distortion by Collateral Requirement: Evidence from Japanese SMEs

Yoshiaki Ogura

No 73, HIT-REFINED Working Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: We examine the significance of the distortionary effect of the collateral requirement to investments in assets pledgeable for collateral by small and medium-sized enterprises (SMEs). The theory predicts that the binding collateral constraint causes over-investment if the price of pledgeable assets is expected to go up steeply while it causes under-investment otherwise. Our structural estimation of the Euler equation under a collateral constraint using the dataset on Japanese SMEs in the 1980s and 1990s shows that the collateral constraint is binding when the price of a pledgeable asset is declining, whereas it is not when the price is increasing. This finding indicates that the binding collateral constraint causes mainly the problem of under-investment for many SMEs in a recession and casts doubt on the welfare effect of the loan-to-value (LTV) ratio cap as a macroprudence policy.

Keywords: collateral constraint; investment; small and medium-sized enterprises; real estate price; loan-to-value ratio (search for similar items in EconPapers)
JEL-codes: E22 G31 R30 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2017-11
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-ent and nep-mac
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https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/28884/wp073.pdf

Related works:
Working Paper: Investment Distortion by Collateral Requirements: Evidence from Japanese SMEs (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:hit:remfce:73

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