Does the Achilles heel of guarantee networks drive financial distress? |
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| Institution: | 1. Department of Accounting and Finance, UWA Business School, The University of Western Australia, 35 Stirling Highway, Crawley, Western Australia 6009, Australia;2. Institute of Social Science Survey, Peking University, 5 Yiheyuan Road, Haidian District, Beijing 100871, China;3. Department of Accounting, School of Business, Renmin University of China, 59 Zhongguancun Street, Haidian District, Beijing 10082, China;1. School of Finance and Accounting, Fuzhou University of International Studies and Trade, Fuzhou, China;2. International Business School, Beijing Foreign Studies University, Beijing, China |
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| Abstract: | To explore characteristics of guarantee networks that drive financial distress, we use a dataset comprising 20,467 firm-year observations from Chinese companies listed on the Shanghai and the Shenzhen Stock Exchanges to construct networks from 85,229 guarantee relationships. We show that guarantee networks have a negative effect on company financial distress, revealed by cash holdings and long-term liabilities. Larger networks, those with an Achilles heel, and companies with high closeness centrality exacerbate this effect, and companies in a stronger financial position suffer greater negative impacts. Guarantee networks may also exert their negative impact by acting as a channel for shareholder tunneling. |
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