Abstract
We develop a static structural model that endogenizes debt guarantee trading over a firm's financing decision in the context of incomplete competition information. The model proves the coexistence of a firm's optimal capital structure and guarantee-trading equilibrium. Drawing on arguments concerning information incompleteness, we show that the underlying guarantee price accounts for the economic implications of changes in the market's competition-structure. Also, we find that information incompleteness leads to a monopoly charge for the guarantee, and further seriously destroys the effectiveness of guarantees with respect to credit enhancements and financing promotions.
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