External Guarantees and Stock Price Crash Risk

62 Pages Posted: 17 Oct 2020 Last revised: 28 Oct 2020

See all articles by Kai Wu

Kai Wu

Central University of Finance and Economics (CUFE) - School of Finance

Zejun Jin

Central University of Finance and Economics (CUFE) - School of Finance

Maobin Xu

Central University of Finance and Economics (CUFE) - School of Finance

Date Written: October 26, 2020

Abstract

We evaluate the financial risk and explore potential motivation of pervasive external guarantee activities. Using a sample of Chinese A-share listed firms during the period from 2008 to 2017, we find a positive association between external guarantees intensity and stock price crash risk. High repayment obligations and weak guarantee relationship amplify the crash risk. The positive association is more pronounced in firms with low business trust, binding financial constraints, and severe information asymmetry. Nevertheless, external guarantees strengthen bank-firm relationship with higher probability of bank loan approval and reduce dependence on related-party transactions. Our findings are consistent with the notion that listed firms are motivated by promoting access to bank loans through external guarantees at the cost of shareholders with potential crash risk.

Keywords: information asymmetry, business trust, financial constraints

JEL Classification: H81, G21, G32

Suggested Citation

Wu, Kai and Jin, Zejun and Xu, Maobin, External Guarantees and Stock Price Crash Risk (October 26, 2020). Available at SSRN: https://ssrn.com/abstract=3670543 or http://dx.doi.org/10.2139/ssrn.3670543

Kai Wu (Contact Author)

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

Zejun Jin

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

Maobin Xu

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

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