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.
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. (Citation2000) 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.