Collateral, Debt Capacity, and Corporate Investment: Evidence from a Natural Experiment

Gan, Jie

This paper examines how a shock to collateral value, caused by asset market fluctuations, influences the debt capacities and investments of firms. Using a source of exogenous variation in collateral value provided by the land market collapse in Japan, I find a large impact of collateral on the corporate investments of a large sample of manufacturing firms. For every 10 percent drop in collateral value, the investment rate of an average firm is reduced by 0.8 percentage point. Further, exploiting a unique data set of matched bank-firm lending, I provide direct evidence on the mechanism by which collateral affects investment. In particular, I show that collateral losses results in lower debt capacities: firms with greater collateral losses are less likely to sustain their banking relationships and, conditional on lending being renewed, they obtain a smaller amount of bank credit. Moreover, the collateral channel is independent of the contemporaneous influence of worsened bank financial conditions.

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Academic Units
Center on Japanese Economy and Business
Center on Japanese Economy and Business, Graduate School of Business, Columbia University
Center on Japanese Economy and Business Working Papers, 256
Published Here
February 14, 2011