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1、外文文献原文Material Source: Hitotsubashi University Author: lichiro uesugiRole of collateral and personal guarantees in relationship lending: evidence from Japans SME loan market1 Introduction A key issue of interest in the recent literature on financial intermediation has been the role of relationship l
2、ending. Relationship lending is particularly common in the case of small business lending, because small businesses typically rely on bank loans for a substantial part of their financing needs but also tend to be informationally opaque. An important issue in this context is the use of collateral, wh
3、ich is a common feature of loan contracts between small firms and banks around the world, and a number of theoretical and empirical studies have examined why it is so widespread and how it relates to the incentives for borrowers and lenders and the borrower-lender relationship. For instance, it has
4、been argued that in the presence of information asymmetries between creditors and borrowers, collateral may mitigate the problem of adverse selection (Bester, 1985; 1987) and/or the problem of moral hazard (Bester, 1994; Boot, Thakor, and Udell, 1991). Collateral also affects the incentives of credi
5、tors, who will use it either as a substitute for (Manove, Padilla, and Pagano, 2001) or complement to (Rajan and Winton, 1995; Boot 2000; Longhofer and Santos, 2000) screening and monitoring efforts. Another aspect of collateral that studies have concentrated on is that its presence may depend on th
6、e length and intimacy of the relationship between creditors and borrowers (Boot, 2000; Boot and Thakor, 1994; Sharpe, 1990). Existing empirical research has yet to reach decisive conclusions about the nature of these relationships. This paper seeks to contribute to the existing literature on collate
7、ral using a unique firm-level data set of the small and medium sized enterprise (SME) loan market in Japan. Explicitly differentiating physical collateral (such as real estate) and personal guarantees by business representatives, we investigate how the use of collateral and personal guarantees affec
8、ts the incentives of borrowers, lenders, and the relationship between them. More specifically, we examine the following three issues. First, we examine whether riskier borrowers are more likely to be required to provide collateral or personal guarantees. Second, we investigate how collateral and per
9、sonal guarantees affect banks monitoring of borrowers. Third, we examine the correlation between the use of collateral and personal guarantees on the one hand and the closeness of borrower-lender relationships on the other. The data set we employ is based mainly on the “Survey of the Financial Envir
10、onment” (SFE) conducted by the Small and Medium Enterprise Agency of Japan in October 2002. In order to focus on firms that mostly depend on bank loans for their financing, we limit the sample to firms satisfying the legal definition of an SME in Japan. We then combine the SFE data for each SME with
11、 information on their main bank obtained from the banks financial statements in order to control for lender characteristics as well. Furthermore, to control for the effect of government credit guarantees on collateral and personal guarantees, in the main analysis of this paper we exclude from the sa
12、mple all firms that enjoyed any form of government credit guarantee. As a result of this screening process, we end up with a sample of 1,702 firms. Our main findings can be summarized as follows. We find that firms riskiness does not have a significant effect on the likelihood that collateral is use
13、d. Thus, we cannot find firm evidence that the use of collateral mitigates moral hazard. We find, however, that banks whose claims are collateralized monitor borrowers more intensively, and that borrowers who have a long-term relationship with their main bank are more likely to pledge collateral. Th
14、ese findings suggest that collateral is complementary to relationship lending. In contrast, the complementarity between relationship lending and personal guarantees is weaker.As far as we know, this is the first empirical study that systematically examines the role of collateral and personal guarant
15、ees in Japans SME loan market. The two main contributions of the paper are as follows. First, given that Japan is generally considered to have a relationship-based financial system in which the relationship-lender, the main bank, plays a central role in corporate financing (Rajan and Zingales, 2003)
16、, the study helps to improve our understanding of the role of collateral in relationship lending and complements existing studies that focus on the United States and Europe. Second, and more importantly, by distinguishing collateral and personal guarantees, the study detects an important role of col
17、lateral in relationship lending that has not been remarked on much before. As we argue below, although a typical SME in Japan has a long-term relationship with its main bank, it actually engages in transactions with several banks, which is not common in other countries. A possible corollary of this
18、is that because of the informational free-rider problem it creates, this practice may reduce the main banks incentive to screen and monitor borrowers. Since collateral defines the order of seniority among creditors, using collateral may mitigate the free-rider problem and enhance the main banks scre
19、ening and monitoring. This incentive effect for the main bank becomes tenuous for personal guarantees, because personal guarantees do not define the seniority among creditors. Thus, our work provides empirical evidence on how collateral affects relationship lenders incentives, and complements previo
20、us studies that focus on the problem of borrower incentives (moral hazard and adverse selection). The remainder of the paper is organized as follows. Section 2 develops our empirical hypotheses which are based on previous theoretical models and empirical research. Section 3 describes the data and va
21、riables that are used in the paper, and explains our empirical model. Section 4 presents the results of our empirical analysis, and Section 5 concludes.2 Empirical hypotheses 2.1 Borrower riskiness Much of the empirical literature in this field examines theoretical predictions of asymmetric informat
22、ion models on the relationship between risk and collateral. If the bank cannot discern borrowers riskiness (hidden information), then collateral may serve as a screening device to distinguish between borrowers and to mitigate the adverse selection problem (Bester, 1985). This follows from the observ
23、ation that a lower-risk borrower has a greater incentive to pledge collateral than a risky borrower, because of his lower probability of failure and loss of collateral. Hence, the lower-risk borrower will choose the contract with collateral. On the other hand, if the lender can observe the ex-ante r
24、isk, but there are information asymmetries with regard to actions taken by the borrower after the loan is extended, collateral potentially provides an incentive to mitigate moral hazard. Thus, opposite to models focusing on hidden information, those concentrating on hidden action suggest that it is
25、observably riskier borrowers that will pledge collateral, because collateral induces more effort by the borrower (Boot, Thakor, and Udell, 1991), or reduces the incentives of strategic default (Bester, 1994).Because our data base only contains measures of firms observed riskiness (namely, credit sco
26、res), we couch our first empirical hypothesis as follows: Hypothesis 1 (H1): The use of collateral is higher among observably higher-risk (low credit score) borrowers if the lender requires collateral in order to mitigate the extent of moral hazard. Alternatively, if borrowers pledge collateral as a
27、 signal of their unobserved high credit quality, then there is negative or no relationship between the use of collateral and the credit score. Consistent with the theory of moral hazard, most existing empirical studies, including Berger and Udell (1990; 1995), have found a positive relationship betw
28、een collateral and borrowers ex-ante risk. Jimnez, Salas and Saurina (2006) directly test the adverse selection and moral hazard hypotheses by separating ex-ante and ex-post measures of borrower riskiness, namely defaults prior to and after the loan origination. Their results suggest that although o
29、bserved riskiness increases the likelihood that collateral is used, there is also a negative association between collateral and default after the loan has been granted, which is consistent with the adverse selection argument. It should be noted that theories of collateral as a solution to moral haza
30、rd and/or adverse selection problems assume collateral is external to the firm. Unfortunately, our measure of the incidence of collateral does not distinguish between firm (inside) collateral and personal (outside) collateral. Hence, throughout our analysis, we will assume that collateral is mostly
31、inside, but allow for the fact that there may also be some outside collateral. As for personal guarantees, they clearly represent outside collateral. 2.2 Screening and monitoring by the lender Recent research on collateral also discusses how collateral affects lenders incentives with regard to infor
32、mation production, that is, the screening of borrowers quality and the monitoring of their performance. These theories of the effect of collateral on lenders incentives apply to both inside and outside collateral. Manove, Padilla, and Pagano (2001), for instance, argue that, from banks point of view
33、, collateral can be considered as a substitute for the evaluation of the actual risk of a borrower. Thus, banks that are highly protected by collateral may perform less screening of the projects they finance than is socially optimal. However, several theoretical studies argue that collateral may com
34、plement lenders screening and monitoring activities. In the presence of other claimants, lenders incentive to monitor borrowers is reduced due to the informational free-rider problem. In order to enhance lenders incentive to monitor, loan contracts must be structured in a way that makes lenders payo
35、ff sensitive to borrowers financial health. Rajan and Winton (1995) argue that collateral may serve as a contractual device to increase lenders monitoring incentive, because collateral is likely to be effective only if its value can be monitored. Moreover, the use of collateral as an incentive will
36、be more extensive when the value of such collateral (as in the case of accounts receivable and inventories, for example) depreciates rapidly if business conditions deteriorate, than when the value of collateral is relatively stable (as in the case of, e.g., real estate). Longhofer and Santos (2000)
37、argue that collateral serves as an incentive for information production by the principal lender in the presence of several creditors, because taking collateral is effective in making its loan senior to other creditors claims. Thus, the bank that provides collateralized loan is able to reap the benef
38、its of screening and monitoring activities. Note that this argument does not straightforwardly apply to personal guarantees, because, in general, personal guarantees do not define seniority among several creditors.As we have a proxy variable for the intensity of monitoring by the principal lender, o
39、ur second hypothesis for the empirical analysis is as follows: Hypothesis 2 (H2): The use of collateral decreases with the intensity of monitoring by the principal lender if collateral reduces lenders incentive to exert effort in loan management. Alternatively, if collateral serves as an incentive d
40、evice to induce monitoring efforts by the principal lender in the presence of other claimants, then we expect a positive relationship between the use of collateral and monitoring intensity. To our knowledge, there are only two existing studies that empirically assess whether the use of collateral an
41、d personal guarantees substitute for or complement screening and monitoring by the lender. Examining Spanish loan data, Jimnez, Salas and Saurina (2006) found that banks with a lower level of expertise (smaller banks and savings banks) in small business lending use collateral more intensively. This
42、is consistent with the theory that collateral is used as a substitute for the evaluation of credit risk. The present study complements these works investigating the relationship between collateral and screening by focusing on the relationship between collateral and monitoring using Japanese firm dat
43、a. Our proxy variable for monitoring intensity is the frequency of document submissions to the main bank. 2.3 Relationship between the borrower and the lender The existing literature on relationship lending provides conflicting predictions on how the strength of the relationship between borrower and
44、 lender affects the likelihood of collateral being pledged. By establishing a solid relationship with the borrower, the lender learns about the hidden attributes and actions of the borrower, thus reducing information asymmetries. Hence, the terms of loan contracts may become more favorable to the bo
45、rrower if the firm has transactions with a specific relationship lender over a long period of time and thus establishes trust, resulting in a lower likelihood of collateral being pledged (Boot and Thakor, 1994). However, a solid relationship may become detrimental to the borrower if the bank exerts
46、its information monopoly by charging higher interest rates or requiring more collateral (Sharpe, 1990). If such a hold-up problem is indeed common, then there is likely to be a positive correlation between the strength of a relationship and the use of collateral. It should be noted that these theori
47、es assume that the collateral is outside collateral. In addition, collateral can also be used as an incentive device in mitigating the soft-budget constraint problem in relationship lending (Boot, 2000). For example, consider the case where a borrower in difficulty asks the bank for more credit and
48、reduced interest obligations in order to avoid default. Although a transaction-based lender would not lend to such a borrower, a relationship lender that has already made loans might accept the borrowers request in the hope of recovering a previous loan. However, once the borrower realizes he can re
49、negotiate the loan contract relatively easily, he has an incentive to misbehave ex ante (the soft budget problem). In such cases, collateral will increase the ex-post bargaining power of the lender and hence reduce the extent of the soft-budget constraint problem, because collateral makes the value of the lenders claim less sensitive to the borrowers total net worth. These theoretical conside
