Title

Loan guarantees and the cost of debt: evidence from China

Document Type

Article

Keywords

Loan Guarantee; Cost of Debt; State-Owned Enterprises; Information Asymmetry

Identifier Data

https://doi.org/10.1080/00036846.2016.1142658

Publisher

Routledge

Publication Source

Applied Economics

Rights Management

CC BY-NC; CC BY-NC-ND

Abstract

In this article, we examine the potential influence of loan guarantees and the nature of ownership on a company’s cost of debt. Using data on Chinese A-share listed companies from 2007 to 2014, we find that guaranteeing another entity’s debt significantly increases the guarantor’s cost of its own debt. Regarding the nature of ownership, our results indicate that the cost of debt for state-owned enterprises (SOEs) is lower than that for non-SOEs. Among SOEs, firms controlled by the central government have lower cost of debt than firms controlled by local governments. We also find some evidence that local government ownership mitigates the effects of loan guarantees on the cost of a guarantor’s own debt.

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