Third-Party Credit Guarantees and the Cost of Debt : Evidence from Corporate Loans

Using an extensive database of bank portfolios collected by the Federal Reserve, this study provides the first comprehensive analysis of third-party credit guarantees in the U.S. corporate loan market. I find that over one-third of corporate loans issued by U.S. banks are fully guaranteed by legal entities separate from borrowing firms. Using an empirical strategy that accounts for time-varying firm and lender effects, I measure the magnitudes by which the existence of a third-party credit guarantee affects loan pricing, loan risk, and loan performance. Moreover, I find that third-party guarantees both substitute and complement collateral in U.S. corporate lending