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The effect of physical collateral and personal guarantees on business startups

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  • Honjo, Yuji
  • Ono, Arito
  • Tsuruta, Daisuke

Abstract

Using microdata for Japan for 2007 and 2012, we examine whether and how financial constraints discourage individuals from starting a business. As proxies for financial constraints, we use prefectural variations in the share of firms relying on physical collateral and personal guarantees. We find that individuals are less likely to become nascent entrepreneurs if they live in a prefecture with a higher share of firms relying on personal guarantees. The negative effect of personal guarantees on becoming a nascent entrepreneur is insignificant when using a subsample for 2012, suggesting that administrative and legislative changes since the 2000s have made personal guarantees less costly for potential entrepreneurs over time. In contrast, we do not find a negative link between physical collateral and business startups. Our findings suggest that the low level of entrepreneurship in Japan is not due to financial constraints. If anything, it is due to a lack of risk-taking by potential entrepreneurs rather than a lack of collateralizable assets.

Suggested Citation

  • Honjo, Yuji & Ono, Arito & Tsuruta, Daisuke, 2024. "The effect of physical collateral and personal guarantees on business startups," Journal of Economics and Business, Elsevier, vol. 130(C).
    • Handle: RePEc:eee:jebusi:v:130:y:2024:i:c:s0148619524000146
    DOI: 10.1016/j.jeconbus.2024.106172
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    1. Honjo, Yuji & Ono, Arito & Tsuruta, Daisuke, 2024. "The effect of physical collateral and personal guarantees on business startups," Journal of Economics and Business, Elsevier, vol. 130(C).

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    More about this item

    Keywords

    Physical collateral; Personal guarantees; Entrepreneur;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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