Research On The Economic Effect Of Guarantee Network

For the sake of information asymmetry problem between firms and banks, guarantee is pervasive around the credit market. Guarantee includes underlying guarantee, pledge guarantee and third-party guarantee. As a specific credit-increasing measures, third-party guarantee differs from underlying guarantee. The credit-increasing ability of third-party guarantee does not depend on firms’visible mortgage but depends on social collateral developed by social network of the firms. Classical theory thinks that guarantee ensures that guarantor can use its information advantage to monitor the borrowers, thus increasing the credit resources allocation efficiency. However, in reality, guarantee gives rise to many problems, and one of them is guarantee network. The guarantee network is a network that many firms are connected through chains of guarantee contract. In guarantee network, firms are viewed as nodes while guarantee relations are viewed as lines that connect firms. Recently, guarantee network problem in China makes many troubles. In the network, once a firm has problem, risk develops along the guarantee chains like domino. Guarantee network has many consequences from micro, network and macro perspective. From micro perspective, guarantee network negatively affects the corporate performance. From network perspective, guarantee network has contagion effect. From regional economic and macro economic perspectives, guarantee network has severe consequences for the regional economic stability. As for the guarantee network, traditional research focus on the positive results of guarantee circle from social network perspective, the effect of financial institutions on guarantee network using case study or the contagion effect of guarantee network using case study. However, scholars lack a complete understanding of economic consequences and causes of guarantee network. And previous research mainly focus on the micro perspective, and thus more research is needed on the different forms and causes of this problem.This paper surveys the consequences of guarantee network and its causes using listed firms’ guarantee network from 2003 to 2012 using formative analysis and empirical analysis. Chapter 1 introduces the research question and methods of this paper. Chapter 2 surveys previous research on information asymmetry, expropriation and network perspectives. After surveying these research, we develop our questions and do the theoretical analysis of guarantee network problems from micro, network and macro perspective. Chapter 3 begins the empirical research. Sample of guarantee comes from wind database. We select the guarantee contract between listed firms, draw the guarantee network graphs among listed firms using UNICET software, and get the related variables of guarantee network. Based on these data we investigate the guarantee network problems.As the beginning of empirical analysis of this paper, chapter 3 firstly investigates the formation of guarantee network. Investigating the formation of guarantee network lays foundation for the analysis of its economic effect. We mainly focus on the impact of institutional environment and governance mechanism on the formation of guarantee network. The results show that when promotion incentive is higher or financial market level is lower, the probability of formation of guarantee network is higher. When the expropriation risk is higher, the above-mentioned effect is larger.After investigating the formation of guarantee network, chapter 4 to Chapter 7 survey the economic consequences of guarantee network from micro-economic, network, macro-economic and policy perspectives. Chapter 4 investigates the effect of guarantee network on individual firm value, focusing on corporate performance and growth. It shows that joining in guarantee network has negative effect on firm performance and growth. This chapter also surveys the transmission channel and institutional sources of negative effect. The opportunistic behavior of the lending firms and block shareholders’ expropriation are the transmission channel. The government intervention and financial market reform lagging are the sources of the negative effect of guarantee network. These results indicate that government intervention on firms’ guarantee policy and lower market level of financial institution will lead to forging and abuse of social network when embedded in formal finance, thus suppressing the information function of guarantee contract.After investigating the micro consequences of guarantee network, chapter 5 investigates the contagion effect of network from network perspective. This chapter uses classical research methods, and finds that when one firm in network is negatively affected, other firms’performance declines. Lawsuit risk, debt capacity and cash holdings are the transmission channels. Finally, this chapter discusses the dynamic evolution mechanism of guarantee network in the presence of contagion effect.After investigating the effect of guarantee network on firm and contagion effect in guarantee network, chapter 6 and 7 survey the macro impact of guarantee network. Chapter 6 investigates how the guarantee network, as a form of interaction among micro agents, affects economic cyclical fluctuation. Results show that guarantee network amplifies the cyclic fluctuation of firm performance and leverage, thus increasing the economic fluctuation. When guarantee network is more complex, these results will be larger. As for the non-state-owned firms or firms located in area with less-developed financial market, these effects will be larger. This chapter indicates that macroeconomic fluctuation can be larger in the context of more firms participating in guarantee networks, and guarantee network can enlarge the fluctuation of regional economy.Chapter 7 investigates how guarantee network affects the effect of macroeconomic policy, especially monetary policy. The existence of guarantee network amplifies the effect of monetary policy, and the contagion effect and pro-cycle leverage are the mechanism channel. The implication of this chapter is that guarantee network connects many individual agents through guarantee contracts and amplifies the effect of macro economic policy.This paper uncovers the mechanism of how guarantee network affects micro firms, network and macro economy, and it helps the supervision authorities to realize the consequence of guarantee network and take measures to avoid these negative effects. Meanwhile, this paper helps realize the mechanism of the effect of social collateral in guarantee, contagion effect of network and how micro agents connection affects the macro economic volatility and the effect of the monetary policy.