Thirst for Money: External Guarantees and Stock Price Crash Risk

67 Pages Posted: 17 Oct 2020 Last revised: 22 Feb 2022

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

The Chinese University of Hong Kong, Shenzhen

Date Written: December 30, 2021

Abstract

We evaluate the financial risk and explore the potential motivation behind the pervasive external guarantee activities of listed firms in China from 2008 to 2017. We find that external guarantee intensity is positively associated with stock price crash risk. Further analysis shows that the negative consequences are driven by external guarantee activities with strong information asymmetry. Asymmetric contracts and guarantee relationships produce crash risk. The management hide guarantee risk, whereas analysts reveal crash risk. In addition, external guarantees strengthen bank-firm relationships. Overall, firms are motivated by accessing loans from related banks and by concealing potential risks associated with external guarantees.

Keywords: external guarantees, information asymmetry, crash risk

JEL Classification: H81, G21, G32

Suggested Citation

Wu, Kai and Jin, Zejun and Xu, Maobin, Thirst for Money: External Guarantees and Stock Price Crash Risk (December 30, 2021). Pacific-Basin Finance Journal, Vol. 74, 2022, 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

The Chinese University of Hong Kong, Shenzhen ( email )

2001 Longxiang Boulevard, Longgang District
Shenzhen, 518172

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