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

35 Pages Posted: 10 Feb 2007

See all articles by Jie Gan

Jie Gan

Cheung Kong Graduate School of Business

Abstract

This paper examines how a shock to collateral value influences firms' debt capacities and investments. Using a source of exogenous variation in collateral value provided by the land market collapse in Japan, I find that collateral has a statistically and economically significant impact on corporate investments. I also provide direct evidence on the workings of such a collateral channel. Exploiting a unique dataset of matched bank-firm lending, I show that firms with greater collateral losses are less likely to sustain their banking relationships and obtain a smaller amount of bank credit.

Keywords: Collateral, Investment, Financial constraints, Bubbles, Cost of external financing, Japanese economy

JEL Classification: G31, G32

Suggested Citation

Gan, Jie, Collateral, Debt Capacity, and Corporate Investment: Evidence from a Natural Experiment. Journal of Financial Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=962316

Jie Gan (Contact Author)

Cheung Kong Graduate School of Business ( email )

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