Networks, Institutional Environment, and Financial Risk Sharing: Intercorporate Loan Guarantees in China

130 pagesThis dissertation comprises an introduction and three empirical chapters that investigate the formation, unfolding, and market responses to intercorporate loan guarantees in China. The reasons why industrial firms are willing to take financial risks for each other depend on the relationship between the guarantor and guarantee: independent firms take turns to offer loan guarantees to achieve mutual benefits of accessing financial capital with their partners; related-party loan guarantees between firms from the same business group serve the function of coinsurance or expropriation of minority shareholders. The first two chapters focus on the formation and evolution of loan guarantee relations between publicly listed firms. In the first chapter, I examine whether the tendency of triadic closure facilitates the formation of loan guarantees between firms indirectly connected via interlock ties to the same third party. I propose that shared third parties may or may not choose to facilitate the closure of an open triad based on the likelihood of sustainable cooperation between the potential partners. Third parties are cautious about introducing and endorsing potential partners if there are signs of a mismatch as they do not want to bear the blame from both parties if later things go wrong. Differences in the level of financial leverage and firm performance indicate a discrepancy in terms of the needs for and abilities to offer loan guarantees, preventing the shared third party from match-making for potential partners. In the second chapter, I investigate what happens after a loan guarantee was formed between a pair of publicly listed firms. Mutually beneficial loan guarantees require partners to reciprocate each other but it is not guaranteed in the informally arranged transactions. In the emergence of the norm of reciprocity, group membership from the same interlock network increases cooperation between partners, showing evidence on the group-level social capital. Besides, I find that high-status firms take the lead to promote reciprocal norms by acting accordingly. The third chapter looks at related-party loan guarantees provided by publicly listed firms to private firms in their business groups. Previous studies show that stock market investors provide an independent assessment of the economic rationale of a related-party transaction based on corporate governance signals but pay less attention to the role of the institutional environment in influencing investors' interpretations of those signals. By investigating how market reactions to related-party loan guarantees vary across regions of heterogeneous institutional environment, I find that the development of the legal environment attenuates negative signals that reveal incentives of the ultimate controller to expropriate minority shareholders and strengthens positive signals of an inclusive decision-making process inside listed firms.2023-06-0