Third-Party Credit Guarantees and the Cost of Debt: Evidence from Corporate Loans
45 Pages Posted: 10 Dec 2019 Last revised: 1 Apr 2021
Date Written: April 1, 2021
Using a comprehensive dataset collected by the Federal Reserve, I find that over one-third of corporate loans issued by U.S. 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.
Keywords: Credit Guarantee, Collateral, FR-Y14Q, Cost of Debt, Loan Performance
JEL Classification: G21, G32
Suggested Citation: Suggested Citation