Personal Guarantees on Bank Loans and SMEs’ CEO Succession

Abstract

Using loan- and firm-level data from a government financial institution for small and medium enterprises (SMEs) in Japan, this paper examines the relationship between personal guarantee agreements on bank loans by SMEs’ managers and their CEO succession. Looking at the period after the introduction of the 2014 Guidelines for Personal Guarantees Provided by Business Owners, which asks banks not to impose personal guarantees on loans to SMEs, we find that receiving loans without personal guarantees increases SMEs’ CEO succession. Combined with SMEs’ ownership data, we also find that the response is moderated for owner-managed firms. Our results also suggest that the connection between personal guarantees and CEO succession is weaker for firms in industries in which family succession is more common. We conducted a survey and found that the causality between borrowing without personal guarantees and succession runs in both directions. Some firms took out loans without personal guarantees for the purpose of facilitating CEO succession, while others found that their CEO succession was made easier by receiving loans without personal guaranees.