Third-Party Credit Guarantees and the Cost of Debt: Evidence from Corporate Loans

Author:

Beyhaghi Mehdi

Abstract

Abstract Using a comprehensive dataset collected by the Federal Reserve, I find that over one-third of corporate loans issued by US banks are fully guaranteed by legal entities separate from borrowing firms. Using an empirical strategy that accounts for time-varying firm and lender effects, I find that the existence of a third-party credit guarantee is negatively related to loan risk, loan rate, and loan delinquency. Third-party credit guarantees alleviate the effect of collateral constraints in credit market. Firms (particularly smaller firms) that experience a negative shock to their asset values are less likely to use collateral and more likely to use credit guarantees in new borrowings.

Publisher

Oxford University Press (OUP)

Subject

Finance,Economics and Econometrics,Accounting

Reference38 articles.

1. Loan guarantees and credit supply;Bachas;Working paper,2019

2. The Typology Of Partial Credit Guarantee Funds Around The World

3. Collateral pricing;Benmelech;Journal of Financial Economics,2009

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