Unsecured Loans and Intangible Investment

In 2008, a government policy bank in Japan expanded its provision of unsecured loans, with many small and medium-sized enterprises subsequently switching from secured to unsecured loans. In this paper, we examine the determinants of firm choice and impacts of these unsecured loans to better understand the distortional effects of any collateral constraints that previously existed in the Japanese economy. Using propensity score matching analysis and instrumental variable regression, we reveal the following. First, younger and growing firms with fewer tangible assets use unsecured loans more intensively. Second, firms choosing unsecured loans increase their investment in intangible assets, including organizational capital. Third, unsecured loan users grew faster than secured loan users, although their credit ratings also deteriorated to some extent. Lastly, the impact of unsecured loans on firm productivity is neutral. Overall, the intrafirm asset reallocation from tangible to intangible assets among unsecured loan users highlights the distortionary effects of collateral constraints.