External Guarantees and Stock Price Crash Risk
61 Pages Posted: 17 Oct 2020 Last revised: 24 Dec 2020
Date Written: December 24, 2020
We evaluate the financial risk and explore the 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 the bank-firm relationship with a 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
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