| Abstract: |
This 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 banks do not change significantly at the time of collateral being
pledged; and (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. |