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

Loan guarantees and credit supply

Mehdi Beyhaghi

Review of Finance, 2022, vol. 26, issue 2, 287-317

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.

Keywords: Credit guarantee; Collateral; FR Y-14Q; Cost of debt (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (11)

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