The Study On The Determination Mechanism Of Surety Bond’s Guarantee Magnification Level

By definition, guarantee magnification is the ratio between Surety Company’sguarantee balances and its net capital. The guarantee balances usually take the form ofcontingent liabilities and account for most part of surety companies’ liabilities. Thus,the determination of guarantee magnification actually reflects surety company’schoices over certain capital structure. Accordingly, the study of guaranteemagnification also suites to the analysis of capital theory. The guarantee magnificationis affected by various factors, the study in related field is destitute and it’s hard to carrythe quantitative study. This thesis analysis the potential affecting factors of guaranteemagnification from the angel of capital theory and uses10years’ panel data selectedfrom foreign mature surety bond market to verify the theory. Based on theidentification of guarantee multiplier’s affecting factors, this study further construct amathematical model and uses analog simulation to study the action type of theaffecting factors on the guarantee magnification.Firstly, the thesis makes a clear definition of the guarantee magnification anddefines the concept of guarantee capital and guarantee liabilities. Then, explain the twoequilibriums of surety bond market and the corresponding differences between suretybond guarantee magnifications and loan guarantee magnification. For the study ofaffecting factors of guarantee magnification, from the angel of capital theory, usesstatic trade-off theory, agency cost theory and signal theory to put forward thetheoretical hypothesis. Based on the debt and equity financing characteristics toestablish mathematical models and deduced the action model of related factors.To further enhance the persuasiveness of the analysis, this paper select publicsurety and insurance companies from the annually Treasury-List and form a ten yearlength penal data from year2004to2013. Uses the fixed effects model to do aempirical analysis of guarantee magnification’s affecting factors. Test results supportthe hypothesis and further clarify the relative weight of each factor.In addition, the paper analysis the daily operations of surety bond company inChina, combined their characteristics of costs and revenue with the proposed guaranteemagnification affecting factors to deduce the extreme conditions of guarantee magnification under the profit maximization assumption. This model connectsdifferent affecting factors of guarantee magnification and can be applied to thedetermination of guarantee magnification by different market participants underdifferent economic conditions. Finally, based on the study result of the affecting factorsand determination mechanisms of the guarantee magnification, combined with thecapital market regulatory system of mature international surety bond market, this papersummarizes by making policy recommendations on improving the guaranteemagnification and the regulation of surety bond companies’registered capital.