Thirst for Money: External Guarantees and Stock Price Crash Risk
73 Pages Posted: 17 Oct 2020 Last revised: 30 Aug 2021
Date Written: August 28, 2021
We evaluate the financial risk and explore the potential motivation of 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. The relationship mainly manifests in nonstate-controlled firms and firms located in financially developed regions. Further analysis shows that the negative consequences are driven by external guarantee activities with strong information asymmetry. In addition, we find that external guarantees strengthen bank-firm relationships. Overall, our findings are consistent with the notion that firms are motivated by accessing loans from relationship banks and concealing potential risks associated with external guarantees.
Keywords: external guarantees, information asymmetry, crash risk
JEL Classification: H81, G21, G32
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