Credit rationing and real assets: evidence from Italian panel data

This paper investigates empirically the role of real assets in credit rationing. The analysis is based on the idea that asset tangibility is inversely related to the probability that a firm will be credit constrained. Indeed, when loans are collateralized, the amount borrowed is determined by the value of collateral. This happens because in a context of asymmetric information banks use real assets as a guarantee in the case of project’s default. Consequently, a reduction in collateral values reduces investments and the borrowing capacity. Although many papers have explained the relationships between the debt level and the value of real assets, empirical evidence is mainly based on large “listed” firms. The question as to the whether these arguments are valid for smaller firms has received limited attention. Many papers also show that specialized assets should fetch a low resale price. This suggests that a high resale price corresponds to a highly redeployable asset and that the reduction in resale value aggravates credit rationing, so that investment declines. My purpose is to show empirically how the value of real assets explains credit rationing of Italian small and medium firms. It is interesting to analyze small and medium firms because of their ownership structure and size they have fewer financial options. Large firms can obtain credit on the public markets while small firms depend on financial intermediaries. This implies that their main source of funds is banks. These firms are more likely to face credit rationing or very high cost of non collateralized debt because banks resolve asymmetric information by charging higher interest rates or collateral requirement on small firms. Moreover, using the Propensity Score Analysis I show that public subsidies reduce credit rationing.