Role of Collateral and Personal Guarantees in Relationship Lending: Evidence from Japan's SME Loan Market


  • We would like to thank the editor, Deborah Lucas, and two anonymous referees for suggestions that significantly improved the paper. We also would like to thank Hans Degryse, Tetsuro Furuta, Akiyoshi Horiuchi, Colin McKenzie, Shinji Mizukami, Hideaki Murase, Zeno Rotondi, Yutaka Soejima, Kotaro Tsuru, and Noboru Yamada, as well as seminar participants at Chuo University, Hitotsubashi University, the Japanese Economic Association, the Japan Society of Monetary Economics, Keio University, the Research Institute of Capital Formation of the Development Bank of Japan, the Shinkin Central Bank Research Institute, the Research Institute of Economy, Trade, and Industry (RIETI) Policy Symposium, the University of Ancona, Warwick Business School, and especially the members of the Corporate Finance Study Group at RIETI for many helpful comments. The views expressed in this paper are ours and do not necessarily reflect those of the institutions with which we are affiliated.


This paper investigates the determinants of the use of collateral and personal guarantees in Japan's SME loan market. We find that firms' riskiness does not have a significant effect on the likelihood that collateral is used. We find, however, that main banks whose claims are collateralized monitor borrowers more intensively and that borrowers who have a long-term relationship with their main banks are more likely to pledge collateral. These findings are consistent with the theory that the use of collateral is effective in raising the bank's seniority and enhances its screening and monitoring. This incentive effect for the bank becomes tenuous for personal guarantees.