Abstract | Tyranny of Collateral is vital for the financial system of developing countries. Guaranteed loan is a Chinese special style to deal with this problem. Financing vs. risk trade-off is studied from the point of guaranteed firms. Placebo tests and DiD analysis with multiple variables based on loan events indicate that guaranteed loan is “icing on the cake” but then shrifts to the "tight spell".
Financial constraints are relieved by trade credit in developed countries (Barrot, 2016), which is rarely studied partly because it is difficult to find the empirical evidence and lack of data (Klapper et al., 2012; Campello and Larrain, 2016). In order to deal with financial constraints, guaranteed loans are popular in China. The first question we want to explore is what kind of firms will get guaranteed loan. Guaranteed firms are better in profitability and bankruptcy than unguaranteed firms, implying that China’s guaranteed loan is the icing on the cake rather than offering fuel in snowy weather. Related relationship has stronger effect on the obtainability of guaranteed loan than the amount of the loan. It also has constraints on the investment of each sequent year, which is explored as an IV.
The other questions we want to know further are studied in this paper, what kind of firm uses guaranteed loan, how is its impact on non-SOE, does it relieve the firm’s financial constraint, has the financing through guaranteed loan been injected to the real economy? To those questions, this paper provides evidence that guaranteed loans do relieve financial constraints, which is more significant than other loans, by adding some Chinese special characteristics, the relationship between guarantor and borrowing firm. But the risk of bankruptcy increases at the same time, which reveals the importance of risk management on guaranteed loans. The Financing vs. risk trade-off implies that financing have impacts on investment adjustment 1 year later and risk have impacts two years later.
The structural effects are also considered in this paper. Causality and reverse-causality between investment and finance, loan path (Roberts, 2015) and investment adjustment are studied. The empirical test on loan paths implies that the obtainability of guaranteed loan is the highest when the firm has proper loan history. Tracking tests of year-by-year effects reveal “tightening spell”, implying that investment shrink is induced in by the guaranteed loan in 3 years.
This paper finds that although guaranteed loans do relieve the financial constraints, they result in new problems in bankruptcy and sequent investment reduction. We take the first step in the dual perspectives of guaranteed loans, exploring the impact of relationship between guarantor and the borrowing company and its impact on the borrower’s sequent investment behavior.
Chinese guaranteed loans provide more observable datasets, which will contribute to the studies in both classical theories in corporate finance and emerging area like trade credit or risk contagion. Since bank is the final lender, the relationship could be observable to study, which may improve the empirical studies in the future.
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