The Effects of Collateral on SME Performance in Japan

This draft: September 2008; Initial draft: February 2008This paper examines how collateral and personal guarantees affect firms' ex-post performance employing the 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 the following. (1) The increase in profitability and reduction in riskiness of borrowers that provide collateral to lenders are more sizeable than of borrowers that do not. (2) On the other hand, the lending attitude and monitoring frequency of borrowers' main bank do not change significantly at the time of collateral being pledged. (3) The increase in profitability of collateralized borrowers is driven by cost reductions rather than by sales growth. These findings are consistent with the hypothesis that by providing collateral, borrowers curb their own incentives for moral hazard in order to further enhance their creditworthiness.科学研究費補助金（特別推進研究） = Grant-in-Aid for Specially Promoted Research39 p