The Effects of Collateral on Firm Performance
43 Pages Posted: 13 Jan 2010
Date Written: January 9, 2010
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. This finding is consistent with the hypothesis that collateral reduces moral hazard by providing borrowers with an incentive to enhance their creditworthiness. Further, we find little evidence that collateral increases the monitoring incentive of lenders, or improves borrowing firms’ access to larger amounts of credit. Finally, we find that these results also hold true for personal guarantees to some extent, but the results are weaker.
Keywords: collateral, moral hazard, propensity score
JEL Classification: D82, G21, G30
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