Investment Distortion by Collateral Requirement: Evidence from Japanese SMEs
Research Institute of Economy, Trade and Industry Discussion Paper Series 15E050 (revised)
42 Pages Posted: 28 Apr 2015 Last revised: 17 Oct 2019
Date Written: December 26, 2016
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.
Keywords: collateral constraint, investment, small and medium enterprises, real estate price, loan-to-value ratio
JEL Classification: E22, G31, R30
Suggested Citation: Suggested Citation