Loan Guarantee, Accounting Conservatism and the Cost of Debt: Based on the Perspective of Guarantor

Abstract

In recent years, firms’ loan guarantee behaviors are becoming more and more prevalent. On the one hand, loan guarantee system helps borrowers more easily access debt financing, and promotes the development of capital markets. However, on the other hand, firms’ loan guarantee behaviors may also bring financial risks for guarantor firms. As an important external governance force, how will debt holders respond to firms’ loan guarantee behaviors?

This study investigates the effects of firms’ loan guarantee behaviors on guarantors’ accounting conservatism and cost of debt. Moreover, this study also examines the interrelationships of loan guarantees, accounting conservatism and the cost of debt. Finally, this study analyzes the effects of state ownership and audit opinion on the relationship between loan guarantees and the cost of debt.

Based on the data of Chinese A-share Main Board listed companies from 2007 to 2014, this study examines these potential relationships empirically. The empirical results indicate that firms’ loan guarantee behaviors have positive effects on guarantors’ accounting conservatism and cost of debt, and most of the positive effects vary with the types and periods of loan guarantees. Moreover, accounting conservatism has a suppressing effect on the positive relationship between loan guarantees and the cost of debt. Furthermore, state ownership has a negative moderating effect on the relationship between loan guarantees and the cost of debt, and the negative moderating effect of local government ownership is stronger than that of central government ownership. Finally, the positive moderating effect of modified audit opinion on the relationship between loan guarantees and the cost of debt is also supported by the empirical results. Overall, the findings of this study contributes to the literature of loan guarantees, accounting conservatism and the cost of debt.

Date of Award	28 Aug 2017
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Liu ZHENG (Supervisor) & Junrui Zhang (External Supervisor)