The Effects of Collateral on Firm Performance

43 Pages Posted: 13 Jan 2010

See all articles by Arito Ono

Arito Ono

Chuo University

Iichiro Uesugi

Hitotsubashi University

Koji Sakai

Hitotsubashi University

Date Written: January 9, 2010

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. 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

Suggested Citation

Ono, Arito and Uesugi, Iichiro and Sakai, Koji, The Effects of Collateral on Firm Performance (January 9, 2010). Available at SSRN: https://ssrn.com/abstract=1533730 or http://dx.doi.org/10.2139/ssrn.1533730

Arito Ono (Contact Author)

Chuo University ( email )

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742-1 Higashinakano, Hachioji
Tokyo 192-03
Japan

HOME PAGE: http://https://sites.google.com/site/aritoono/Home

Iichiro Uesugi

Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8306
Japan
+81-42-580-8348 (Phone)

Koji Sakai

Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8601
Japan

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