Abstract
We evaluate the financial risk and explore the potential motivation behind the pervasive external guarantee activities of listed firms in China from 2008 to 2017. We find that external guarantee intensity is positively associated with stock price crash risk. Further analysis shows that the negative consequences are driven by external guarantee activities with strong information asymmetry. Asymmetric contracts and guarantee relationships produce crash risk. The management hide guarantee risk, whereas analysts reveal crash risk. In addition, external guarantees strengthen bank-firm relationships. Overall, firms are motivated by accessing loans from related banks and by concealing potential risks associated with external guarantees.
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