Khan, Muhammad Bilal; Kayani, Uma Nawaz; Saleem, Humme a; Aysan, Ahme
Fa uk
A icle
Loan gua an ee, managemen ea nings o ecas s and cos
o deb : e idence om Chinese manu ac u ing i ms
Cogen Economics & Finance
P o ided in Coope a ion wi h:
Taylo & F ancis G oup
Sugges ed Ci a ion: Khan, Muhammad Bilal; Kayani, Uma Nawaz; Saleem, Humme a; Aysan, Ahme
Fa uk (2024) : Loan gua an ee, managemen ea nings o ecas s and cos o deb : e idence om
Chinese manu ac u ing i ms, Cogen Economics & Finance, ISSN 2332-2039, Taylo & F ancis,
Abingdon, Vol. 12, Iss. 1, pp. 1-22,
h ps://doi.o g/10.1080/23322039.2024.2314887
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Loan gua an ee, managemen ea nings o ecas s
and cos o deb : e idence om Chinese
manu ac u ing fi ms
Muhammad Bilal Khan, Uma Nawaz Kayani, Humme a Saleem & Ahme
Fa uk Aysan
To ci e his a icle: Muhammad Bilal Khan, Uma Nawaz Kayani, Humme a Saleem & Ahme
Fa uk Aysan (2024) Loan gua an ee, managemen ea nings o ecas s and cos o deb :
e idence om Chinese manu ac u ing fi ms, Cogen Economics & Finance, 12:1, 2314887, DOI:
10.1080/23322039.2024.2314887
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GENERAL & APPLIED ECONOMICS | RESEARCH ARTICLE
Loan gua an ee, managemen ea nings o ecas s and cos o deb :
e idence om Chinese manu ac u ing i ms
Muhammad Bilal Khan
a
, Uma Nawaz Kayani
b
, Humme a Saleem
c
and Ahme Fa uk Aysan
d
a
Koha Uni e si y o Science and Technology (KUST), Koha , Pakis an;
b
College o Business, Adminis a ion, Al-Ain
Uni e si y Abu-Dhabi, Abu-Dhabi, Uni ed A ab Emi a es;
c
Depa men o Economics, Na ional Uni e si y o Mode n
Languages (NUML), Islamabad, Pakis an;
d
College o Islamic S udies, Qa a Founda ion, Hamad Bin Khali a Uni e si y,
A -Rayyan, Qa a
ABSTRACT
One o he mos p essing issues acing de eloping economies is how o p o ide expan-
sion capi al o exis ing businesses. Howe e , his issue is mo e p essing in China, whe e
p i a e en e p ises su e signi ican inancial cons ain s om capi al ma ke limi a ions.
The e o e, he signi icance o ob aining hi d-pa y loan gua an ees ises among p i a e
i ms in he seconda y loan ma ke . This s udy in es iga es he ela ionship be ween loan
gua an ees and he i m’s cos o deb and he mode a ing e ec o managemen ea n-
ings o ecas s. We ind ha loan gua an ees ha e a signi ican nega i e ela ionship wi h
he i m’s cos o deb . Howe e , a posi i e ela ionship be ween in o ma ion asymme y
measu es and loan gua an ees is mo e p onounced, sugges ing ha loan gua an ees
educe he signi icance o in o ma ion asymme y issues, which impai bo owing i ms’
e-paymen abili y and inc ease he c edi isk o gua an o s and banks. In con as , e-
quen and quali y managemen ea nings o ecas s help i ms o build hei epu a ion in
he ma ke by educing he conce ns o in o ma ion asymme y, in o ma ion isk, agency
p oblems, and loan epaymen wi h banks, which, in u n, bene i i ms in educing hei
cos o deb . Ou s udy esul s a e obus o he use o wo-s age leas squa e analysis,
and Heckman wo-s age ea men e ec model. This wo k o e s he la es con ibu ion
o he ecen unde s anding o he e ec s o loan gua an ees in educing he cos o deb
and he i al ole o managemen ea nings o ecas s in i ms’g ow h.
IMPACT STATEMENT
A i m’s loan gua an ee is o en ecognized as a use ul ins umen o mi iga ing he isks
in ol ed wi h bo owing o i ms ha lack a solid c edi his o y and audi ing p ocedu es.
Howe e , loan gua an ees a e equen ly associa ed wi h iskie o lowe -quali y bo ow-
ing en e p ises, which leads o se ious in o ma ion asymme y p oblems. This, in u n,
has a nega i e e ec on he company’s epu a ion and exposes i o h ea s o bank and
gua an o non-paymen . Ou empi ical s udy looks a how loan gua an ees migh educe
deb cos s by neglec ing in o ma ion asymme y in he bank lending p ocess.
Fu he mo e, ou indings p o ide empi ical e idence o he subs i u ion e ec o man-
agemen ea nings o ecas s o e loan gua an ees in lowe ing he i m’s cos o deb . The
indings imply ha bo h loan gua an ee and managemen ea nings o ecas s ha e a
nega i e impac on i ms’cos o deb in China. Fi s , on he one hand, he loan gua an-
ee lowe s he cos o deb by igno ing in o ma ion asymme y, which esul s in ad e se
selec ion and e hical unce ain y conce ns, bo h o which aise he de aul and li iga ion
isks aced by inancial ins i u ions and clien s. Second, managemen ea nings o ecas s
ha e a subs i u ion e ec on unding injec ion in o China’s bank loans. I may help i ms
imp o e hei epu a ions, educing in o ma ional asymme ies conce ns such as un a o -
able sho lis ing and e hical inconsis ency, and lowe ing hei cos o deb in banks’
c edi lending p og ams. The p esen s udy con ibu es o he mos con empo a y
unde s anding o he impac s o loan gua an ees on deb cos educ ions and he c i ical
ole o managemen ea nings o ecas s in company expansion.
ARTICLE HISTORY
Recei ed 22 June 2023
Re ised 20 Oc obe 2023
Accep ed 2 Feb ua y 2024
KEYWORDS
Managemen ea nings
o ecas ; loan gua an ee;
cos o deb ; in o ma ion
asymme y
REVIEWING EDITOR
Jasman Tuyon, Uni e si i
Teknologi MARA, Ko a
Kinabalu, Malaysia
SUBJECTS
Finance; Co po a e Finance
JEL CLASSIFICATION
M21; H81
CONTACT Ahme Fa uk Aysan [email p o ec ed] College o Islamic S udies, Qa a Founda ion, Hamad Bin Khali a Uni e si y,
A -Rayyan, Qa a
ß2024 The Au ho (s). Published by In o ma UK Limi ed, ading as Taylo & F ancis G oup
This is an Open Access a icle dis ibu ed unde he e ms o he C ea i e Commons A ibu ion License (h p://c ea i ecommons.o g/licenses/by/4.0/), which
pe mi s un es ic ed use, dis ibu ion, and ep oduc ion in any medium, p o ided he o iginal wo k is p ope ly ci ed. The e ms on which his a icle has been
published allow he pos ing o he Accep ed Manusc ip in a eposi o y by he au ho (s) o wi h hei consen .
COGENT ECONOMICS & FINANCE
2024, VOL. 12, NO. 1, 2314887
h ps://doi.o g/10.1080/23322039.2024.2314887
1. In oduc ion
Al hough China’s ex e nal capi al ma ke expanded ex ensi ely a e he es ablishmen o bo h s ock
ma ke s (i.e. Shanghai and Shenzhen) in ea ly 1990, howe e , many i ms’especially Non-S a e-Owned
En e p ises (NSOE), a e s ill acing igo ous inancial di icul ies due o he coun y’s ini ial public o e -
ings (IPOs) es ic ions. Fo example, o access he equi y ma ke unde he IPO sys em, he i ms mus
main ain a high-le el lis ing s anda d and wai o a leng hy, unce ain pe iod o ime o app o al om
Chinese Secu i y Regula o y Commission (CSRC) au ho i ies (Chu & Xu, 2022). A p io applica ion and
clea ance om CSRC a e equi ed e en du ing seasoned s ock o e ings by S a e-Owned En e p ises
(SOE) o ge access o equi y ma ke unds. As a esul , he IPO s ock ma ke sys em p esen s challenges
o new and s uggling businesses in mee ing hei capi al equi emen s. Besides, China’s co po a e
bond ma ke is also qui e limi ed and ypically acili a es la ge-scale i ms and SOEs.
Fu he mo e, la ely, he end o a shadow bank sys em has eme ged in he coun y wi h pee - o-
pee inancing. S ill, i ms conside ha he in e es a e o e ed in his sys em is mo e ema kable han
con en ional banking loans. The e o e, a ious Chinese i ms s ongly ely on bank lending o addi ional
capi al needs (Rizwan, 2021). Conside ing such a scena io, banks ha e subs an ial nego ia ing igh s and
usually need an ou side pa y (called a gua an o ) o make a law ul en e p ise owe he p incipal lende ’s
loan in he e en o a epaymen de aul . Based on he gua an ee p o ide ’s s ong c edi his o y, banks
end o conside lis ed i ms ideal applican s o gua an o s. As a secu ed pa y, he p ima y lende bene-
i s om such c edi gua an ees by elie ing he lending es ic ions by supplying he bo owe wi h
insu ance (F. Wang e al., 2020). Howe e , Loan Gua an ees (LG) a e widely acknowledged wo ldwide in
bank lending due o secu ed loans and ewe bo owe s’de aul isk. Fo ins ance, Beyhaghi (2022)
epo s ha Uni ed S a es banks p o ided o e one- hi d o pe sonal o co po a e gua an ees o sepa -
a e legal en i ies o co po a e loans. Simila ly, Dagde i en and Ka wowski (2022) documen ha gua an-
ees elaxed c edi es ic ions o i ms by os e ing access o loan unding in he Uni ed Kingdom. In
compa ison, S o m (2019) inds ha LG lowe ed lending cos s by 16–20% and aised o al deb ’s median
alue o 9.6% in I alian i ms. In con ex o China, Gu e al. (2022) epo ha mo e han 50% o Chinese
i ms a e engaged in LG o ob ain secu ed loans. Mo eo e , du ing COVID imes, s udies such as Co e
and De Ma co (2021); Gonzalez-U ibe and Wang (2020), Jim
enez e al. (2022); Balyuk e al. (2020); Ba ik
e al. (2020); Cole (2020); Duchin e al. (2022); Hubba d and S ain (2020) in Eu ope and he Uni ed
S a es examine he banking and o he lende s’ ole as public liquidi y condui s h ough s a e-gua an eed
loans o he Small Medium En e p ises (SME). Howe e , gua an o s a e o en mo e willing o sus ain
losses and ace g ea e exposu e o isk. In gene al, o de e mine he ne isk e ec , comme cial banks
may conside he ex en o he gua an ee p o ided by he gua an o . Fo ins ance, i he bo owe
de aul is high, he gua an ee’s p o ec ion becomes mo e aluable in educing he bank’s ne isk.
Simila ly, i he bank has o pay a ee o p emium, his cos mus be ac o ed in o he ne isk calcula-
ion. O e all, he ne isk e ec would be he di e ence be ween he g oss isk inc ease and he isk
educ ion he gua an ee p o ides. I he gua an ee e ec i ely co e s he po en ial losses and he cos o
he gua an ee is easonable, he ne isk e ec may be posi i e (i.e. he bank’s o e all isk is educed).
Ne e heless, i he gua an ee is insu icien o cos ly, he ne isk e ec may s ill inc ease isk. O e all,
he LG commi men agg a a es he ope a ing and inancial unce ain ies expe ienced by gua an o s
based on mu ual and a ious obliga ion a angemen p o isions in he case o ailu e, such as he
Monkey King delis ing and Leng Guang asse es uc u ing e en s (F. Wang e al., 2020).
Simila ly, lis ed i ms in he Chinese c edi ma ke passi ely engage in LG ela ionships due o social
capi al’s mo i e. Conside ing his, many lis ed i ms p o ide bank LG o o he pee i ms o ob ain u u e
gua an eed loans. Howe e , hese c edi esou ce exchanges be ween pee i ms may aise he o e -
gua an ee occu ence a e and cause he ha des inancial dis ess o he gua an o . The LG ag eemen s
esemble he pu -op ion, as hey con ain an inhe en asymme y in he dis ibu ion o isk and ewa d
o he gua an o . Hence, he gua an o mus ake downside isks wi hou a aining upside ewa ds,
inc easing he deb o ’s mo al haza d. In gene al, such o e -gua an ee beha io ’s lis ed i ms a e likely o
ha e a g ea e isk o de aul . Thus, he alue and iabili y o lis ed i ms may be signi ican ly ha med by
o e -gua an eed beha io (Johnson e al., 2000; Jian & Xu, 2012). I manage s in end o decline he
ad e se in luence o o e -gua an ees, hey migh ini ially ace he mo i a ion behind he o e -
2 M.B. KHAN ET AL.
gua an ee beha io o e ade undue con ingen liabili ies and possible inancial isk (Xu & Wu, 2022).
Besides his phenomenon, some s udies ha e shown ha LG ad e sely a ec s he ela ed pa ies, such
as exp op ia ion o mino i y sha eholde s and inc ease gua an o ’s deb cos s and own audi ee (F.
Wang e al., 2020).
Al hough se e al p e ious empi ical s udies examine he use ulness o LG, bu li le empi ical wo k
has been done on i s p ospec i e e ec on he sys em. The signi ican cause o LG cos is mo al haza d
and ad e se selec ion, i.e. in o ma ion asymme y p oblem. Since LG p o ides banks wi h insu ance
agains de aul losses, hey a e encou aged o ask po en ially isky bo owing i ms o apply o LG. As
he gua an o s do no di e en ia e low- isk bo owing i ms om isky i ms, LG d aws many high- isk
bo owing i ms, leading o inapp op ia e capi al dis ibu ion. This po en ial in o ma ion asymme y
p oblem is se e ely g im in China, whe e he a io o LG is mo e han 50% (Cohen e al., 2019). Fo
example, in he pas se e al decades, he S a e-Owned Banks (SOB) o China we e used as a policy ool
by he s a e adminis a ion. The SOBs ha e no main ained necessa y lending eco ds o acili a e u u e
loan alloca ion, especially o p i a e i ms. As a esul , his si ua ion o ms a mo e signi ican in o ma ion
gap be ween banks’and p i a e i ms’ ela ionship. Simila ly, his in o ma ion p oblem inc eased when
hese banks issued loans on LG basis. Because du ing LG-based loans, he banks ac as he c i ical dom-
inan pa y in he ela ionship among he ela ed pa ies’ i ms (Vagliasindi e al., 2022). The LG gua an-
o played a quie ole du ing he lending and emained unawa e o he bo owing i m’s ac i i ies due
o a lack o coope a ion, less quali ied p o essionals, and limi ed access o in o ma ion dominance, which
inc eased he possibili y o gua an o s’de aul isk.
1
Fo ins ance, On he one hand, Banks ha e access
o aluable in o ma ion abou bo owe s, which can allow hem o assess c edi wo hiness mo e accu -
a ely han en i ies wi h less in o ma ion. This in o ma ional ad an age can enable banks o make mo e
in o med lending decisions and some imes p o ide loans o bo owe s who migh o he wise be consid-
e ed oo isky. As a esul , banks can cha ge a modes in e es a e p emium o ex ending c edi , aking
ad an age o hei supe io in o ma ion. Howe e , whe he his modes in e es a e di e en ial is
enough o compensa e o assuming mo e isk depends on se e al ac o s, such as he bank’s isk ole -
ance, isk assessmen accu acy, ma ke condi ions, compe i ion, and egula o y ac o s (N. Chen e al.,
2016; Lee e al., 2022; Yan e al., 2017). On he o he hand, i banks wan o diminish secu ed loan e-
paymen isk due o he isky na u e o bo owing i ms, hey migh adjus hei slack beha io and
ein o ce he moni o ing and sc eening unc ion o a gua an o . In con as , banks o en o e look bo -
owing i ms’moni o ing and sc eening p ocesses ha bene i bo owing i ms. Thus, his p ac ice ha ms
he c i ical impo ance o in o ma ion asymme y be ween bo owe i ms and banks; as a esul , i
inc eases gua an o s’de aul isk and banks’bad deb s. O e all, he LG p o ided o iskie i ms igo -
ously a ec s he ela ed pa ies mo e han o he loan echnologies. Al hough he e ec s o in o ma ion
asymme y in LG ha e been no ed ea lie , howe e , no empi ical s udy o such a possible p oblem has
been conduc ed acco ding o he au ho s’knowledge (Bel ame e al., 2018).
Ou esea ch has wo goals. Fi s , we wan o see whe he and how LG migh lowe COD by igno ing
in o ma ion asymme y in he bank lending p ocess. Nex , ou esea ch o e s empi ical p oo o he subs i-
u ion impac o MEF o e LG in educing he i m’s COD. Despi e his, common wisdom in he banking
indus y is ha LG is sa e since i gua an ees loan epaymen . Howe e , LG is o en linked wi h low-quali y
o iskie bo owing en e p ises, which c ea es se e e in o ma ion asymme y issues, which in u n has dis-
as ous e ec s on he i m’s c edibili y and exposes i o he gua an o and bank non-paymen h ea s. In
addi ion, he in o ma ion asymme y issue could no be dis ega ded since i is a signi ican componen in
de e mining he success o en e p ises’ a ious inancing a angemen s (S anula e al., 2020). I also has
implica ions o he s uc u e o bank loan con ac s (F. Wang e al., 2020).
In his s udy, we only add ess he ad e se e ec s o LG on he i ms’ epaymen and de aul isks.
China’s banks see LG as a aluable ool o educing he isks associa ed wi h lending o businesses ha
lack an es ablished c edi his o y and audi ing p ocedu e. This aises an in e es ing issue abou bank
lending: i LG is he mos c ucial app oach o Chinese companies o acqui e long- e m loans wi hou
ulne abili y, hen why has i no been add essed ye ? The subjec is impo an because, on he one
hand, SOE has di ec access o SOB h oughou he decision-making p ocess o loans. On he o he
hand, he s a e o e s an implici gua an ee and e i ies ha SOE will no ail on hei epaymen s.
Howe e , many NSOE ha e ob ained LG ia well-known gua an o s, ins i u ional gua an ee se ices, and
COGENT ECONOMICS & FINANCE 3
gua an ee ci cles since hey see i as a aluable ins umen o mi iga ing isk and os e ing success ul
pa ne ships wi h inancial ins i u ions
2
.
Second, we p o ide da a ha suppo s he hypo hesis ha MEF con ibu es o COD. The cos o
equi y in he capi al ma ke may be lowe ed, and in o ma ion asymme y can be mi iga ed wi h he use
o MEF (Bangmek e al., 2020; Ramos Meza e al., 2021; B. Y. Wang e al., 2022). Guan e al. (2020) docu-
men ha MEF is a p ope olun a y disclosu e mechanism ha assis s i ms in achie ing ma ke ea n-
ings expec a ions and in luences hei epu a ion o anspa en , p ecise, and quali y epo ing.
Howe e , li le has been unde aken o analyze how MEF a ec s he decision-making p ocesses o c ed-
i o s, excep o he esea ch wo k o Hsieh e al. (2019) and Fan e al. (2021). Hsieh e al. (2019) ind
ha i ms p e e o p o ide MEF o announce be e news be o e bank loan ini ia ion, a ain bene i s
om mo e posi i e con ac s, and d aw addi ional c edi o s’a en ion. They ind ha MEF educe he
associa ed deb sp ead by 14.06 basis poin s o e 9 mon hs a e he paymen qua e s ac i a ing he
loan. In con as , i ms wi h g ea e MEF a e subjec o igh e con ac ing equi emen s and d aw ewe
lende s. Thei esea ch also showed ha i ms sys ema ically issue MEF be o e hey en e in o loan con-
ac s and ha he in o ma ion con ained in MEF should be in eg a ed in o bank loan con ac s. In add-
i ion, Fan e al. (2021) emphasize he in luence o MEF in c edi de aul swaps and ound ha c edi
sp eads a e subs an ially inc easing (dec eased) abou he good (bad) news o MEF, and he esponses
a e much mo e signi ican o he eal ea nings announcemen s. Ou s udy in ends o ex end he li e a-
u e by examining how MEF a ec s he i m’s COD. In pa icula , we in es iga e he ollowing wo ele-
an esea ch ques ions. (1) whe he i ms wi h equen and p ecise MEF can educe he COD o a i m,
and (2) whe he MEF can be an e ec i e ool o echnology o subs i u e LG in mi iga ing he in o ma-
ion asymme y p oblem in he bank lending p ocess.
Ou s udy’s baseline eg ession analysis demons a es ha he LG dec eased by 0.048% i m’s COD
using da a om a sample o 800 manu ac u ing businesses (i.e. 7200 i m-yea obse a ions) ob ained
om China Secu i ies Ma ke s and Accoun ing Resea ch (CSMAR) be ween 2010 and 2018. N-Analys , a
p oxy o in o ma ion asymme y, was ound o ha e a nega i e and s a is ically signi ican e ec , sug-
ges ing ha banks elied on g ea e analys co e age when deciding how much o es ic loans o gua -
an eed i ms and how likely hey we e o equi e colla e al and pe o mance-p icing p o isions. As a
esul o he isk-sha ing a angemen , gua an o s now bea he b un o c edi isk, e en i banks ha e
been lazy
2
in moni o ing and sc eening bo owe s. The isk o ailu e by he gua an o ’s company and
banks is heigh ened because he LG co enan ends o downplay he signi icance o in o ma ion asym-
me y, which in u n causes ad e se selec ion and mo al haza d conce ns. Since he LG assumes he
c edi isk and shields he bo owe om liabili y, he ele ance o in o ma ion asymme y be ween he
company and he lende is mi iga ed when LG is p esen .
In addi ion, we ind ha he MEF coe icien is 0.0128%, nega i ely and s a is ically signi ican ly co e-
la ed wi h he i m’s COD, demons a ing he impo ance o MEF in how banks p o ide loans. Lechle
e al. (2019) and Villena e al. (2021) a gue ha in o ma ion asymme y may be quickly mi iga ed by
companies ha a e p epa ed o sha e mo e in o ma ion e icien ly. As a esul , businesses wi h lowe
COD may p o i om MEF ha a e bo h high quali y and exac by inc easing hei access o c edi loans.
In addi ion, we disco e ed a posi i e and s a is ically signi ican coe icien o 0.0382% o he in e ac ion
e m among LG and MEF, indica ing ha MEF has a mode a ion impac on LG and add esses he issue
o in o ma ion asymme y be ween banks and i ms. Ou esea ch o e s s ong e idence ha NSOE has
a emendous po en ial o ecei e c edi loans on an in o mal basis, allowing hem o minimize hei
COD e en i p io s udies ha e highligh ed he c i ical impo ance o SOE in China. O e all, ou esea ch
indica es ha LG and MEF echnologies ha e a conside able e ec on he lending p ac ices o inancial
ins i u ions. Endogenous LG p o ides a possible endogenei y and sel -selec ion bias p oblem, which is a
cause o wo y in ou esea ch. Fo his eason, we used Heckman’s(1979) wo-s age app oach, which
allowed us o conside ha dis inc po en ial de e minan s may ha e di e en ial e ec s on each LG
s age. A la ge p opo ion o businesses o en choose no o use LG, bu by using hese echniques, we
can mi iga e he isks o endogenei y and sel -selec ion bias. Despi e he possibili y o sel -selec ion bias,
Heckman’s(1979) wo-s ep analysis demons a es a nega i e co ela ion be ween LG, MEF, and COD. Fo
ins ance, a 1% inc ease in LG o he ypical business in he sample was associa ed wi h a 7.78% d op in
4 M.B. KHAN ET AL.
COD. MEF inc eases o 1% we e associa ed wi h a 0.90% d op in COD a he median businesses in he
s udy. The es o ou s udy’s conclusions a e equally economically meaning ul bu di e en .
Ou esea ch con i ms his hypo hesis, and ou indings a e consis en e en a e using he a ious
analysis me hods; hese da a demons a e ha LG dec eases he COD bu a he expense o he pa ies’
abili y o communica e e ec i ely on c ucial in o ma ional ma e s. Ou esea ch adds o he schola ly
canon in wo ways. Fi s , LG is nega i ely associa ed wi h COD, implying ha i ms ecei ing LG educe
hei COD in China. Fu he , o b idge he li e a u e gap in he bank- i m lending ela ionship in Chinese
i ms, ou s udy examines how LG a ec s China’s bank lending p ocess a he cos o in o ma ion p ob-
lems. The se ies o es s show nega i e esul s o in o ma ion asymme y a iable, i.e. N-Analys , which
speci ies ha he p esence o highe analys ollowings o gua an o i ms, banks equi e less in ense
moni o ing and due-diligence because c edi isk o he bo owe is bea by he gua an o . The e o e,
lending banks a oid sc eening and moni o ing he ac i i y o bo owing i ms, which educes he impo -
ance o he in o ma ion asymme y p oblem. In gene al, his negligen beha io by banks can a ec
unds alloca ion o suppo sa e bo owe s wi h lowe iskiness and inc ease banks’de aul isk. P io
s udies abou LG in China discuss he mo i a ion o LG, de e minan s o LG, and economic consequen-
ces o LG (Gu messa & Ndinda, 2014; Q. Huang & Lu, 2017; Kim & Rhee, 2009; Ramos Meza e al., 2021;
Shi e al., 2019; B. Y. Wang e al., 2022).
Ou s udy, howe e , is up- o-da e since i highligh s how co po a ions inc easingly use LG o aise he
de aul isk o gua an o s and banks. Second, his esea ch adds o he li e a u e on bank c edi loans by
p o iding e idence ha MEF a e an essen ial pa o he bank c edi loan p ocedu e ha helps busi-
nesses educe hei COD. P e ious esea ch has la gely igno ed he essen ial unc ion o MEF in he
c edi lending p ocess. As a esul , we wan o p o ide mo e cla i y on how MEF migh d ama ically
impac in o ma ion asymme y in he c edi lending p ocess be ween bank en e p ises and i ms ha
p o i om educed COD. Ou esea ch di e s om o he s in i s ocus on wages and inco po a ion o a
new ea nings elemen ha expands he body o in o ma ion. As MEF has a eplacemen impac on LG,
i boos s he i m’s epu a ion and educes in o ma ion asymme y be ween banks and bo owing busi-
nesses, and we expec ha mo e MEF in he u u e will play a signi ican ole in ge ing smoo h bank
c edi loans.
As o he es o he pape , i is o ganized as ollows: The li e a u e e iews and hypo hesis o mula-
ion a e discussed in Sec ion 2. The esea ch p ocedu es a e desc ibed in Sec ion 3. The empi ical
esea ch is p esen ed in Sec ion 4. The las sec ion is 5.
2. Li e a u e e iew and hypo hesis de elopmen
The bank’s exis ence is i al as i e ec i ely moni o s and sc eens bo owe s, which di e en ia es hem
om o he s akeholde s (Allen & San ome o, 1997; Bha acha ya & Thako , 1993; Fama, 1985; Goodha ,
1989). Banks’specializa ion lies in he collec ion o p i a e in o ma ion o bo owe s and hei disc ee
handling (F eixas & Roche , 1997). In gene al, banks ga he i ms’s a egic in o ma ion abou he e -
enue, expendi u e, and g ow h s a egies h ough managing inances and deposi accoun s (Diamond &
Rajan, 2001; Ruhle, 1997). Despi e he excessi e in o ma ion, in e ac ions be ween banks and i ms a e
a ely pe ec , esul ing in occasional c edi app o al o ejec ion mis akes. The e o e, banks ace in o ma-
ion asymme y p oblems (F eixas & Roche , 1999) in a manne ha he c edi ma ke canno be clea ed
by he changes in p ices (in e es a es). Consequen ly, his leads o an equilib ium o non-Wal asians,
whe e some agen s emain unsa is ied (Bonne e al., 2016). Empi ical s udies on seminal heo y pos u-
la ed ha i is di icul o i ms o access long- e m loans wi hou a c edi a ing (Diamond, 1991; Ja ee
& Modigliani, 1969; S igli z & Weiss, 1981). Fo example, S igli z and Weiss (1981) p o ide a subs an ial
jus i ica ion o policy ac ion by o malizing he condi ion whe e c edi a ioning migh a ise in he in o -
ma ion asymme y egime. The colla e al channel has been he p ima y mechanism used by hese
schemes o add ess he pe cei ed c edi a ioning. Howe e , he lende may op o c edi a ioning due
o in o ma ion impe ec ion and associa ed high isk (Chan & Thako , 1987; Ja ee & Modigliani, 1969;
S igli z & Weiss, 1981). O e all, p io s udies on c edi a ioning indica e ha in he eal wo ld, he sig-
ni icance o his phenomenon emains unce ain due o i s mixed esul s (Be ge & Udell, 1992; Fazza i
e al., 1988; Hall, 1992). Simila ly, he li e a u e on c edi a ioning has also ex ensi ely explo ed he
COGENT ECONOMICS & FINANCE 5
signi icance o colla e al in his con ex . Fo example, Besanko and Thako (1987) and Bes e (1985) con-
ended ha colla e al may unc ion as a ool o so ing because bo owe s p o ide colla e al o loans
agains highe quali y p ojec s wi h low isk o de aul . The e o e, colla e al ac s as a so ing ool o
banks o ca ego ize high- isk and low- isk bo owe s. This app oach allows banks o educe in o ma ion-
ela ed issues. In addi ion, he ex-pos heo y a gues ha colla e al is desi able by banks om iskie bo -
owe s (Fang e al., 2020) o mi iga e highe c edi isk associa ed wi h bo owe s (Jim
enez & Sau ina,
2004; Be ge e al., 2017). Despi e ha ing high-quali y p ojec s, no all en e p ises ha e access o colla -
e al. This issue indica es a key eason o jus i y public sec o in ol emen in capi al ma ke s h ough
implemen ing loan gua an ee schemes (Le i sky and P asad (1987); Cowling (2010) and Cowling e al.
(2023). Ou objec i es o his s udy is o p esen he a gumen s o how he LG mechanism modi ies he
signi icance o in o ma ion asymme y in lowe ing bank loan a es and a o ing en e p ises wi h lowe
COD. We hen desc ibe how MEF helps i ms wi h lowe COD by sol ing he in o ma ion asymme y
issue be ween banks and i ms.
2.1. Loan gua an ee and cos o deb
Ou s udy sugges s wo inclusi e a gumen s on how LG may a ec he cos o deb . The i s a gumen
is ocused on he impo ance o in o ma ion asymme y. Oli a es-Caminal and Mus apha (2020) p o ide
e idence ha i ms ha con on mo e signi ican unce ain ies a e likely o gi e imp ecise in o ma ion.
Al hough gua an eed loans may success ully enhance c edi a ailabili y, Ramos Meza e al. (2021) disco -
e ed ha en e p ises in ol ed in loan gua an ees a e mo e likely o ail han i ms bo owing wi hou a
loan gua an ee due o he in o ma ion asymme y issue.
Gi en he g ea e likelihood o in o ma ion asymme y p oblems igge ed be ween he bo owing
i ms and banks in LG ac i i ies, banks a e less likely o inc ease he choice o compliance and subs an-
i e moni o ing, dec ease sc u iny p ocedu es, educe he moni o ing pe iod, and use less expe ienced
moni o ing eams. Fo ins ance, banks may examine whe he he gua an o has a sound inancial pos-
i ion and deb epaymen abili y. The e o e, banks will cha ge lowe in e es a es o compensa ion o
in o ma ion asymme y issues. A ms ong e al. (2015) emphasized he impo ance o in o ma ion in e -
media ies, pa icula ly inancial analys s, in lowe ing he in o ma ion asymme y issue in bank lending.
Acco ding o hei esea ch, inancial ins i u ions a e mo e likely o p o ide c edi o companies wi h
ex ensi e analys co e age, ha e educed colla e al equi emen s, and use pe o mance p icing clauses.
The s udy also e ealed ha banks a e mo e da a-conscious when ex ending c edi o companies wi h
ex ensi e analys co e age and less likely o c ea e ac i e syndica es when dealing wi h deb o s o poo
c edi g ades. Since he LG p o ide , in o he wo ds, he gua an o is o en a signi ican o ganiza ion
wi h g ea e in o ma ion disclosu es and mo e assu ance o he bank in epaymen isk, LG is essen ial
o low-quali y bo owe s o access bank c edi .
Al hough he LG’s in luence in lowe ing COD and u he dis o ing he signi icance o in o ma ion
asymme y has no been s udied in p e ious esea ch, i has been he subjec o se e al in es iga ions
on he e ec s o bank lending in China. Fo example, Ge e al. (2020) disco e ed ha SOEs had a COD
han NSOE’s owing o s a e dominance and associa ed in o ma ion asymme y issues. Acco ding o he
esul s o hei esea ch, banks o en p o ide gua an o businesses a ‘condi ioned deb ’a a highe cos
in e es a e o compensa e o he inc eased isk o he loan caused by he gua an ee. Fo his eason,
Chinese gua an o i ms should a oid pu suing gua an eed loans. Compa ed o colla e alized loans and
c edi loans, secu ed loans ha e a highe de aul isk, acco ding o esea ch by D’Hauwe s e al. (2020).
The s udy concluded ha gua an o s do no ha e access o mo e con iden ial in o ma ion abou busi-
nesses han banks do. The e o e, gua an o s ace se e al in o ma ion asymme y di icul ies, including
ad e se selec ion and mo al haza d, which may aise he de aul a e o he gua an ee business.
Se e al ecen inciden s in China ha e aised conce ns ha linked pa ies’in e es s would be ha med
by he issuing o LG (El-Helaly, 2018). The e o e, gua an o s o en le y a mo e signi ican p emium cos
since hey ha e es ic ed access o pa icipa e in companies’p ice di e en ial gene a ed om he com-
pany’s isk. In his case, he inc eased p emium may lead o highe business loan cos s, u he exace -
ba ing he ad e se selec ion issue ha o ces low- isk companies ou o he c edi ma ke . The mo al
6 M.B. KHAN ET AL.
haza d is also made wo se since co po a ions may be emp ed o pa icipa e in mo e isky plans due o
he inc eased inancing cos s (Knigh , 2020).
In ligh o he p eceding, we pos ula e ha iskie i ms may ob ain bank loans a a minimum alue
i.e. isk- ee in e es a e, o he bene i o i ms wi h lowe COD, e en hough LG can ac as a signaling
ool o banks o di e en ia e he ex-an e iskiness o i ms (Liu e al., 2016). Dong and Yang (2023)
a gued ha he ole o LG is o ans e de aul isk o insu e s; hus, he bank loan dec eases o he
minimum alue, i.e. he isk- ee a e. On he o he hand, we sugges ha LG lessen he impac o in o -
ma ion asymme y ac oss banks and companies, which aises he de aul isk o banks and gua an o s.
Due o in o ma ion asymme y, LG bo owe s a e mo e likely o de aul han non-bo owe s (Ramos
Meza e al., 2021); hus, LG has a highe de aul isk han o he lending echnologies (D’Hauwe s e al.,
2020). The i s hypo hesis ollows wha has been said hus a . The in o ma ion asymme y is he basis
o he second a gumen .
H
1
: Loan gua an ees ha e a nega i e impac on he cos o deb in a Chinese con ex .
2.2. Managemen ea nings o ecas s, loan gua an ee, and cos o deb
The in o ma ion asymme y p oblem in China highligh s he coun y’s poo ins i u ional condi ions
(Zhang e al., 2019). In a bank- i m in e ac ion, asymme ic in o ma ion di icul ies a e common in China,
as Jing e al. (2022) no ed, since banks ha e been used as an essen ial policy ins umen by he go e n-
men o decades. Banks canno base c edi loan dis ibu ion choices on he c edi his o ies o NSOE,
which is a signi ican p oblem. Lending o NSOE becomes p oblema ic in his si ua ion due o in o ma-
ion asymme y. Acco ding o Abou Saleh and Al Tuwaij i (2022), du ing he ea ly s ages o a bank’s
engagemen wi h a company, he bank lacks he ime o collec su icien quali a i e in o ma ion abou
he company o make in o med lending decisions. Since NSOE in China s ill ha e in o mal accoun ing
p ocedu es, in e nal managemen con ol weaknesses, and co po a e go e nance conce ns, Chinese
banks need o ecognize signals and e alua e he quali y o possible bo owing en e p ises, as Lin e al.
(2020) no ed.
Gi en he di icul y in ob aining such loans, he exis ing li e a u e e ealed ha China had paid li le
a en ion o he c edi loan lending indus y. Fo example, Tian e al. (2022) documen ed ha Chinese
i ms ha ing a close ela ionship wi h banks a e mo e likely o apply o c edi loans only because hese
loans a e p esumed o a ela ionship-based loan in China. Y. Huang e al. (2020) and Jin e al. (2022),
using da a om pe sonal and SME loans in China, con i med he lowe isk o c edi loans compa ed o
secu ed loans by LG, as es ablished in he o iginal esea ch by O gle (1970). In addi ion, as ecen ly
documen ed by Kamal and Abu-Hijleh (2022), businesses should concen a e on quali a i e in o ma ion
in o de o mi iga e he in o ma ion asymme y p oblem and secu e c edi loans; his demons a es he
i m’s c edibili y and economic o ganiza ion, bo h o which a e necessa y o he success ul epaymen
o he loans. Acco ding o se e al pieces o li e a u e, Chinese businesses need a ool o p o ide i al
in o ma ion abou he en e p ises’ epu a ion, economic s eng h, and payback capabili ies o banks
h oughou he sc eening p ocess. Co po a e go e nance, inancial pe o mance, and poli ical ies ha e
all been shown o ha e p omise as eliable indica o s in co po a ions’lending (Bandiyono, 2020; B aun,
2022; C. C. Chen e al., 2020). This esea ch, howe e , ies o supplemen he li e a u e by p oposing an
al e na i e o an LG in he o m o a MEF, which can help businesses p esen hei inancial s anding
and c edi wo hiness o banks in he o m o so in o ma ion so ha he banks will be mo e willing o
ex end c edi and he i ms will ha e a lowe cos o bo owing.
Acco ding o Ande son e al. (2020), o es ablish a company’s inancial heal h and capaci y o epay a
loan om u u e commi men s, banks need bo h pas da a and p ojec ions o he u u e, i.e. MEF. Fo
his eason, MEF as p ospec i e da a may be elied upon as a help ul esou ce o businesses and inan-
cial ins i u ions h oughou he loan p ocedu e. Mo eo e , Diaz-Bece a e al. (2021) a gued ha MEF is
a c ucial olun a y disclosu e ool ha may a ec a company’s image by deli e ing a p ecise and ans-
pa en assessmen o he i m’s us wo hiness. By p o iding consis en , accu a e, and up- o-da e in o -
ma ion o e ime, MEF aids in de eloping a company’s s anding, which is seldom subjec o apid
change. While doing so, he gap in knowledge be ween he company and i s s akeholde s is na owed,
COGENT ECONOMICS & FINANCE 7
4.6. Endogenei y es
4.6.1. 2-S age leas squa e (2SLS) analysis
One conce n on ou baseline analysis is ha he LG and MEF a e endogenous o COD. The i m ha ing
an LG may ob ain mo e ad an ages due o isky beha io . Fo example, i he bank does no o e a
lowe in e es a e h ough an LG, he i ms acqui e an unsecu ed loan simul aneously. Thus, addi ional,
unmeasu ed ou comes could in luence he COD du ing bank lending o an excluded a iable bias. Ou
s udy is also conce ned wi h MEF because i is a simple p oxy o non-p ice exp essions in he lending
p ocess. MEF may be associa ed wi h se e al o he non-p ice e ms in he lending ac i i ies, which may
be linked wi h COD. I he ecip ocal ela ion be ween p ice and non-p ice e ms is no a anged co -
ec ly, he e migh be a possible endogenei y p oblem. Acco ding o A i in e al. (2020), he COD and
non-p ice e ms a e concu en ly es ablished; i hese ac o s a e p esen in he same eg ession equa-
ion, he possibili y o endogenei y may inc ease.
In se e al classical esea ch s udies, endogenei y is a majo d awback. The e o e, his s udy may ha e
omi ed a iables ha can be compa ed wi h MEF, LG, and COD, leading o a di e en ela ionship
be ween he DV and IVs. Like he baseline modeling, his s udy in ends o dec ease he endogenei y
issue by es ing he impac s o LG and MEF on he COD by combining a ious con ols wi h a ixed-
e ec app oach o e alua ing ime-se ies h esholds. In his s udy, howe e , we used ano he me hod,
i.e. he 2SLS echnique, o manage endogenei y (p esen ed in Table 6). Thus, ollowing Al-Qudah e al.
(2020), a 2SLS ins umen al a iable echnique was pe o med. The key esul s ma e ialized on he COD
o a i m; we used a a iable ins umen al echnique on he LG a iable in his s udy. We used a 1s
Table 5. Resul s o Heckman’s(1979) wo-s ep selec ion bias me hod analysis esul s.
Va iables
1s S ep
2nd S ep
Model-1 Model-2
LGD COD COD
LG –−0.03984 −0.07768
–(0.0197) (0.02269)
MEF ––−0.0901
––(0.0439)
LGMEF ––0.03883
––(0.01946)
N-Analys 0.00513 −0.00237 −0.00261
(0.00258) (0.00032) (0.0003)
Le 1.23414 0.36392 0.42859
(0.12456) (0.05132) (0.04784)
ROE −2.50934 −1.19869 −1.22411
(0.34817) (0.11883) (0.11122)
SOE −0.07209−0.07449 −0.04860
(0.04344) (0.01668) (0.00711)
B4AQ −0.27480 −0.11445 −0.13511
(0.11111) (0.02281) (0.01806)
T.Q 0.05685 0.02687 0.02898
(0.01547) (0.00288) (0.00258)
FA 0.02177 0.00449 0.01169
(0.00354) (0.00485) (0.00107)
CFO −0.49461−0.22461 −0.22523
(0.2972) (0.03335) (0.03181)
G ow 0.31655 0.15479 0.15670
(0.09341) (0.01673) (0.01557)
FS −0.00859 −0.02285 −0.01627
(0.02349) (0.00544) (0.00293)
Ins umen a iable
PEF 0.0240 ––
(0.00517) ––
IMR –0.77668 0.84781
–(0.0652) (0.05995)
Cons an −0.80732 −0.41643 −0.67128
(0.20535) (0.16233) (0.10868)
LR chi2(10) 313.97
Pseudo R2 0.057
R-squa ed –0.14242 0.1418
Obse a ions 7,200 7,200 7,200
,,p esen s deg ee o signi icance a 10%, 5%, and 1%, espec i ely. Appendix A desc ibes he en i e a iables men ioned abo e.
14 M.B. KHAN ET AL.
s age model o de ine he obse ed deg ee o COD wi h LG lags as an ins umen al a iable and all con-
ols p e iously used as exogenous a iables (Han e al., 2019). Then, he expec ed alue subs i u ed he
LG a iable in he 2nd s age model h ough he 1s s age. The 2nd s age indings showed iden ical
esul s, showing ha he LG dec eased COD.
5. Conclusion
Ou esea ch explo ed he possible in luence o LG and MEF in dec easing he i ms’COD. Ou cu iosi y
in how LG and MEF a ec a company’s COD was piqued by he con adic o y indings on he impac o
asymme ies in da a on hese wo ypes o i ms. We u ilized da a om he Shanghai and Shenzhen
s ock exchanges o examine 7200 i m-yea s o Chinese manu ac u ing A-sha e businesses om 2010 o
2018. We disco e ed ha LG and MEF a e nega i ely associa ed wi h and conside ably educe he i m’s
COD. Fi s ly, we ound ha while LG helps businesses cu he in e es a e on bank loans and eap he
ad an ages o educed COD, hese gains a e no subs an ial. Nega i e and s a is ically signi ican esul s
o he N-Analys in o ma ional asymme ies a iable indica e ha banking ins i u ions ely on g ea e
epo ing quali y when making loans o secu ed businesses wi h ewe es ic i e co enan s, a educed
p obabili y o equi ing colla e al, and a educed isk o pe o mance-p icing clauses. None heless, lend-
e s ans e inancial isks o gua an o s unde nea h he isk-sha ing scheme wi hou ho oughly examin-
ing he bo owing en e p ise’s a ibu es. These LG ag eemen s educe he signi icance o asymme ic
in o ma ion, which in u n leads o ad e se selec ion and e hical unce ain y issues, bo h o which
inc ease he de aul s and lawsui isks aced by inancial ins i u ions and coun e pa ies. Since he LG
assumes he de aul isk and o e s ex a secu i y o he bank, he exis ence o LG mi iga es he signi i-
cance o in o ma ion asymme y be ween he bo owing business and he bank. Secondly, we disco -
e ed a nega i e and s a is ically signi ican ela ionship be ween MEF and COD, sugges ing ha MEF
plays a c i ical ole in educing o ganiza ions’COD. The posi i e and s a is ically signi ican di ec
Table 6. Resul s o 2-s age leas squa e (2SLS) analysis.
Va iables
Model-1 Model-2
COD COD
LG −0.0352 −0.05699
(0.01206) (0.01751)
MEF –0.0996
–(0.0388)
LGMEF –0.06103
–(0.02045)
N-Analys −0.00348 −0.00202
(0.0011) (0.00057)
Le −0.2098 −0.07339
(0.00675) (0.00624)
ROE 0.17441 0.17063
(0.02551) (0.02943)
SOE −0.02613 −0.01098
(0.00872) (0.00808)
B4AQ 0.05716 0.07299
(0.01086) (0.01155)
T.Q 0.01055 0.01853
(0.00645) (0.00627)
FA 0.00496 −0.00249
(0.00318) (0.0016)
CFO 0.058610.06545
(0.0169) (0.01804)
G ow −0.01134 0.00691
(0.0005) (0.00034)
FS −0.01657 −0.02219
(0.00249) (0.00191)
Cons an 0.86168 1.17767
(0.11714) (0.13181)
WI-Tes 32.145 30.426
Sa gan s a s 0.5908 0.6065
Obs. 7,200 7,200
R-sq. 0.192 0.994
,,p esen s deg ee o signi icance a 10%, 5%, and 1%, espec i ely. Appendix.
A desc ibes he en i e a iables men ioned abo e.
COGENT ECONOMICS & FINANCE 15
ela ionship be ween MEF and LG also means ha MEF has a eplacemen impac on cash in usion in
China’s bank loans. Consequen ly, MEF may aid businesses in enhancing hei epu a ions, which mini-
mizes in o ma ional asymme ies issues like ad e se sho lis ing and mo al unce ain y and lowe s hei
COD in banks’money lending p og ams.
As a bonus, we disco e ed ad e se ou comes o SOE wi h COD in bo h scena ios, sugges ing ha
SOE-con olled en e p ises ha e LG, educing COD compa ed o NSOE wi hou LG. I was in line wi h he
idea ha SOE bene i s om p e e en ial ea men om s a e-owned ins i u ions in e ms o loan s a-
egic planning and cos o bo owing, which in u n helps businesses wi h a educed cos o deb .
Findings om SOE also indica ed ha , al hough LG may imp o e i m p o i abili y by lowe ing he in e -
es a es, i ul ima ely weakens he ma ke p ospe i y o SOE. Ou esea ch adds o he g owing body o
li e a u e in inance and economics ha examines he in e play be ween he LG, MEF, and COD in de el-
oping economies like China. The e o e, he esea ch indica ed ha MEF had an essen ial impac in
educing COD, sugges ing ha subsequen comme cial bank issuing decisions may be in luenced by
imp o emen s in MEF pe o mance.
Theo e ical implica ions a ising om his s udy ad ance ou comp ehension o he complex in e play
among hi d-pa y LG, he COD, and MEF. No ably, he esea ch unco e s he pi o al ole o LGs in alle-
ia ing capi al cons ain s o p i a e i ms in de eloping economies, wi h a speci ic ocus on China, as
hey signi ican ly educe COD. Fu he mo e, he posi i e co ela ion ound be ween measu es o in o -
ma ion asymme y and LGs unde sco es hei unc ion in mi iga ing challenges ela ed o in o ma ion
and enhancing he c edi wo hiness o bo owing i ms, con ibu ing aluable insigh s in o he unde ly-
ing mechanisms o LGs in c edi ma ke s. Addi ionally, he s udy unde sco es he heo e ical signi icance
o MEFs in COD educ ion, unde sco ing he essen ial ole o anspa en inancial epo ing in es ablish-
ing us and epu a ion o i ms. On he p ac ical on , hese indings o e ac ionable guidance o
a ious s akeholde s, including p i a e i ms, inancial ins i u ions, and policymake s. Fi ms ope a ing in
de eloping economies can s a egically employ LGs o e ec i ely educe bo owing cos s, he eby ee-
ing up capi al o hei g ow h ini ia i es. The emphasis on he impo ance o equen and high-quali y
MEFs unde sco es he p ac ical alue o anspa en inancial epo ing p ac ices, assis ing i ms in cul i-
a ing us among lende s and secu ing mo e a o able c edi e ms. Financial ins i u ions may ecog-
nize he po en ial ad an ages o inco po a ing LGs in o hei business s a egies, while policymake s
may con empla e he implemen a ion o policies ha acili a e LG accessibili y and os e inancial ans-
pa ency. This comp ehensi e app oach con ibu es no only o heal hie c edi ma ke s bu also o
educed bo owing cos s o i ms, ul ima ely p omo ing economic g ow h in de eloping economies. In
summa y, his esea ch encompasses bo h heo e ical insigh s and p ac ical s a egies o na iga e he
challenges o capi al cons ain s, c edi e ms, and inancial anspa ency in de eloping economic
con ex s.
Despi e i s con ibu ions, his esea ch has ce ain limi a ions. Fi s ly, i p ima ily ocuses on he
Chinese con ex , po en ially limi ing he gene alizabili y o i s indings o o he de eloping economies
wi h dis inc inancial sys ems and egula o y landscapes. Mo eo e , he s udy assumes a causal ela ion-
ship be ween LG and COD, po en ially o e looking o he ac o s in luencing bo owing cos s. The e a e
se e al p omising a enues o u u e esea ch in his domain. Expanding he geog aphical scope o
encompass o he de eloping economies could o e a b oade pe spec i e on he ole o LG and MEF in
COD educ ion. Fu he mo e, in es iga ing how a ious ypes o LG (e.g. co po a e gua an ees and go -
e nmen gua an ees) a ec bo owing cos s could be a compelling di ec ion. Fu he esea ch could also
del e in o he speci ic mechanisms h ough which MEFs in luence c edi isk and COD. Finally, quali a-
i e esea ch me hods, such as in e iews and case s udies, could complemen he quan i a i e indings
by p o iding insigh s in o he mo i a ions and expe iences o i ms and inancial ins i u ions in employ-
ing LG and MEF.
No es
1. In China, cou s ha e uled ha LG loan ag eemen s a e unlaw ul since a gua an o canno collec in e es i he
bo owe (LG ecipien ) de aul s. When calcula ing he le e age a io, he LG gi en by he gua an o ’s company
is no included as deb . In addi ion, because he gua an ee ecei es such a small pe cen age o he loan
16 M.B. KHAN ET AL.
amoun when he con ac is signed, he paymen o he LG canno se e as a ail. En us ed loans a e
ag eemen s in which a bank se es as a gua an o ’s agen o se ice he loan.
2. Acco ding o Mano e e al. (2001), he wo d lazy used o banks ha olun a y selec con ac ha includes a
high le el o pos ed colla e al o /and gua an ees wi hou sc eening p ojec s, hus he la e “lazy”would be
e icien .
Disclosu e s a emen
No po en ial con lic o in e es was epo ed by he au ho (s).
Funding
Open Access unding p o ided by he Qa a Na ional Lib a y.
Abou he au ho s
D Muhammad Bilal Khan is wo king a he Koha Uni e si y o Science and Technology, Koha , KPK, Pakis an. He
g adua ed om he School o Economics and Managemen , Wuhan Uni e si y, P.R. China wi h a Ph.D. in
Managemen in Accoun ing, He can be con ac ed a : [email p o ec ed]
D Uma is cu en ly wo king as an Assis an P o esso a Al Ain Uni e si y, Uni ed A ab Emi a es. He g adua ed
om Lincoln Uni e si y, New Zealand wi h a Ph.D. in Accoun ing and Finance. He can be con ac ed a : uma .
[email p o ec ed]
D Humme a Saleem is cu en ly wo king as an Assis an P o esso a Na ional Uni e si y o Mode n Languages
(NUML), Islamabad, Pakis an. She g adua ed om he School o Economics and Managemen , Wuhan Uni e si y, P.R.
China wi h a PhD in Economics. She can be con ac ed a : [email p o ec ed].
D . Ahme Aysan is a p o esso a he College o Islamic S udies (CIS) and he P og am Coo dina o o he PhD and
MS p og ams in Islamic Finance and Economy. He can be con ac ed a : [email p o ec ed]
ORCID
Ahme Fa uk Aysan h p://o cid.o g/0000-0001-7363-0116
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COGENT ECONOMICS & FINANCE 21
Appendix A:
Va iable desc ip ion
Va iable De ini ion
COD In e es expendi u e as a pe cen age o o al liabili ies (including cu en and u u e) is he o mula used o de e mine
a company’s cos o deb (COD).
LG The end-o -yea gua an ee balance as a pe cen age o o al asse s
LGD When a company has a loan gua an ee a he end o he yea , he alue is 1; when i does no , i is 0.
MEF I a company has issued a p ognosis o yea , he MEF alue is 1; o he wise, i is 0.
N-Analys N-Analys is he me ic o inance analys s, de ined as he o al numbe o people who make ea nings p edic ions o
companies in a gi en yea .
LEV To al liabili ies di ided by o al asse s is a company’s le e age (LEV).
ROE Re u n on equi y (ROE) is calcula ed by di iding a company’s ne income by he ma ke alue o i s sha eholde s’
equi y.
FS The na u al loga i hm o he company’s o al esou ces a he comple ion o he i m-yea is known as i m size (FS).
SOE S a e-owned en e p ises (SOE) a e compu ed wi h a alue o 1 i he company is ini ially possessed o managed
immedia ely by he go e nmen and a alue o 0 al e na i ely.
B4AQ I he company is inspec ed by one o he Big4 audi o s in yea , hen he Big4 audi quali y (B4AQ) is 1; o he wise,
i is 0.
FA Fi m age (FA) is he pe iod since a pa icula company’s ini ial public o e ing (IPO).
CFO Cash Flow om Ope a ions (CFO) is he end-o -yea a io o ope a ing capi al low o cash holdings.
G ow Re enue g ow h (G ow) is de ined as he pe cen age inc ease in sales o e a speci ic ime pe iod, and is ound by
di iding o al sales by he di e ence be ween he p e ious sales pe iod and he cu en one.
Tobin’s Q T.Q. is calcula ed by mul iplying he s ock ma ke p ice by he book p ice o deb imes he i m’s ne e enues.
Ind.FE The indus y dummy a iable is used o adjus o he ixed impac s o he indus y.
Y . FE The yea dummy a iable is used o adjus o seasonal and o he yea -speci ic ac o s.
22 M.B. KHAN ET AL.
