Third-Party Credit Guarantees and the Cost of Debt: Evidence from Corporate Loans

45 Pages Posted: 10 Dec 2019 Last revised: 1 Apr 2021

See all articles by Mehdi Beyhaghi

Mehdi Beyhaghi

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: April 1, 2021

Abstract

Using a comprehensive dataset collected by the Federal Reserve, I find that over one-third of corporate loans issued by U.S. banks are fully guaranteed by legal entities separate from borrowing firms. Using an empirical strategy that accounts for time-varying firm and lender effects, I find that the existence of a third-party credit guarantee is negatively related to loan risk, loan rate, and loan delinquency. Third-party credit guarantees alleviate the effect of collateral constraints in credit market. Firms (particularly smaller firms) that experience a negative shock to their asset values are less likely to use collateral and more likely to use credit guarantees in new borrowings.

Keywords: Credit Guarantee, Collateral, FR-Y14Q, Cost of Debt, Loan Performance

JEL Classification: G21, G32

Suggested Citation

Beyhaghi, Mehdi, Third-Party Credit Guarantees and the Cost of Debt: Evidence from Corporate Loans (April 1, 2021). Available at SSRN: https://ssrn.com/abstract=3492106 or http://dx.doi.org/10.2139/ssrn.3492106

Mehdi Beyhaghi (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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