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Investment Distortion by Collateral Requirement: Evidence from Japanese SMEs

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  • Ogura, Yoshiaki

Abstract

We examine the significance of the distortionary effect of the collateral requirement to investments in assets pledgeable for collateral by small and medium-sized enterprises (SMEs). The theory predicts that the binding collateral constraint causes over-investment if the price of pledgeable assets is expected to go up steeply while it causes under-investment otherwise. Our structural estimation of the Euler equation under a collateral constraint using the dataset on Japanese SMEs in the 1980s and 1990s shows that the collateral constraint is binding when the price of a pledgeable asset is declining, whereas it is not when the price is increasing. This finding indicates that the binding collateral constraint causes mainly the problem of under-investment for many SMEs in a recession and casts doubt on the welfare effect of the loan-to-value (LTV) ratio cap as a macroprudence policy.

Suggested Citation

  • Ogura, Yoshiaki, 2017. "Investment Distortion by Collateral Requirement: Evidence from Japanese SMEs," HIT-REFINED Working Paper Series 73, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:remfce:73
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    Cited by:

    1. Hazama, Makoto & Uesugi, Iichiro, 2015. "Heterogeneous Impact of Real Estate Prices on Firm Investment," HIT-REFINED Working Paper Series 30, Institute of Economic Research, Hitotsubashi University.

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    More about this item

    Keywords

    collateral constraint; investment; small and medium-sized enterprises; real estate price; loan-to-value ratio;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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