Loan Guarantees and Guarantor Default Risk: Evidence from China

In China, loan guarantees play an important role in compensating for the deficiencies of the Chinese capital market. The provision of loan guarantees to third parties is a fundamental economic activity of listed Chinese companies. Many studies have examined the impact of guarantees on the value of guarantors. However, the transfer of risk to guarantors has not been studied. In this paper, we use data from listed Chinese companies that have issued bonds to analyze the impact of loan guarantees on the credit spreads of the companies’ bonds. Our results show that if risk is well managed, the provision of loan guarantees does not affect the default risk of guarantors. However, when a guarantor firm is controlled by the government, the provision of guarantees increases the firm’s default risk.

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