Loan guarantees and guarantors’ accounting conservatism: evidence from China

ABSTRACT

Listed companies in China have provided large numbers of loan guarantees for borrowers in recent years. The loan guarantee size of A-share Main Board listed companies was about RMB 3.85 trillion at the end of 2017. On the one hand, loan guarantees help borrowers access debt financing, which promotes the development of capital markets. On the other hand, however, loan guarantees can increase the financial risks for guarantors. This study investigates the effects of loan guarantees on guarantors’ accounting conservatism. Based on a large sample of listed companies from 2007 to 2017, we find that loan guarantees have a significant positive effects on guarantors’ accounting conservatism. When firms provide loan guarantees for borrowers, they report more conservative accounting information. Moreover, the effect of loan guarantees on accounting conservatism varies by borrower. Listed companies report more conservative accounting information when they provide guarantees for non-subsidiaries rather than for subsidiaries. Among the companies providing guarantees for non-subsidiaries, the companies engage in higher levels of accounting conservatism when they guarantee the borrowing of controlling shareholders instead of the borrowing of non-controlling shareholders.

KEYWORDS:

• Loan guarantee
• accounting conservatism
• information asymmetry
• loan guarantees type

JEL CLASSIFICATION:

• G34
• H81
• M41

Acknowledgments

We gratefully acknowledge helpful comments received from participants at the 19th Symposium on Empirical Accounting Research in China.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Tunnelling means expropriation of minority shareholder wealth by controlling shareholders through various means. Johnson et al. (2000) argue that tunnelling involves the transfer of resources from the firms to their controlling shareholders, through self-dealing transactions, fraud and loan guarantees.

² CSMAR (China Stock Market & Accounting Research) database is the largest economic and financial research database in China.

³ In subsequent robustness tests, we also use the continuous variable and categorical variable of loan guarantees instead of the dummy variable.

⁴ DIB database is the first database that focuses on the internal control and risk management of enterprises in China.

Additional information

Funding

Bin Liu gratefully acknowledges research support from Research Start-up Funds of Xiangtan University and Hunan Provincial Research Base of Budget and Accounting Theory. Yuan Yuan gratefully acknowledges research support from Fundamental Research Funds for the Central Universities, South China University of Technology (No.QNZD202204), 2021 Guangdong Planning Funds for Philosophy and Social Science (No.GD21YGL19), 2022 Guangzhou Planning Funds for Philosophy and Social Science (No.2022GZQN13), Guangdong Basic and Applied Basic Research Foundation (No.2022A1515110912), Natural Science Foundation of Guangdong Province (No.2023A1515012416). Junrui Zhang gratefully acknowledges research support from National Natural Science Foundation of China (No.72072143). Jian Zhou gratefully acknowledges research support from the Lloyd Fujie/Deloitte Foundation Distinguished Professorship and the Shidler College of Business at University of Hawaii at Manoa.