Affiliated guarantee risk control and firm cash holdings: Evidence from China

Abstract

As an inseparable part of a company's business risk, the ability to reduce the impact of affiliated guarantee risk on business decisions has become a topic of great concern to governments. This paper focuses on the “Circular on Enhancing Risk Prevention and Mitigation of Loans from Corporate Guarantee Circles” (ERPML) and explores its impact on affiliated guarantee risk control and firms' cash holdings. The findings suggest that affiliated guarantee risk control increases firms' cash holdings, a conclusion supported by robustness tests. This increase is primarily driven by preventive motives and the reduction of shareholders' agency costs. The heterogeneity test indicates that the influence of affiliated guarantee risk control is more pronounced in nonstate-owned firms and firms with low institutional shareholding, low debt financing and low financialization. Finally, the economic results suggest that affiliated guarantee risk control helps reduce firms' business risks and improve their performance. Overall, this paper provides empirical evidence of the positive economic consequences of strengthening the regulation of associated guarantee risk.