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Thirst for money: External guarantees and stock price crash risk

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  • Wu, Kai
  • Jin, Zejun
  • Xu, Maobin

Abstract

We evaluate the financial risk and explore the potential motivation behind the 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. Further analysis shows that the negative consequences are driven by external guarantee activities with strong information asymmetry. Asymmetric contracts and guarantee relationships produce crash risk. The management hide guarantee risk, whereas analysts reveal crash risk. In addition, external guarantees strengthen bank-firm relationships. Overall, firms are motivated by accessing loans from related banks and by concealing potential risks associated with external guarantees.

Suggested Citation

  • Wu, Kai & Jin, Zejun & Xu, Maobin, 2022. "Thirst for money: External guarantees and stock price crash risk," Pacific-Basin Finance Journal, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:pacfin:v:72:y:2022:i:c:s0927538x22000191
    DOI: 10.1016/j.pacfin.2022.101724
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    More about this item

    Keywords

    External guarantees; Information asymmetry; Crash risk;
    All these keywords.

    JEL classification:

    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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