Does “Related-party Guarantee Risk Management and Control” Promote Firm Innovation? Evidence from a Quasi-natural Experiment of the Guarantee Circle Law

Dou Zhi; Han Yonghui; Wang Xianbin

doi:doi:10.16538/j.cnki.jfe.20221118.203

Summary

Under the background of building a unified national market, the world is facing the pressure of inflation rising and the escalation of the conflict between Russia and Ukraine, and the financial systemic risk has also risen significantly. On the premise of preventing financial risk, China’s 14th Five-Year Plan proposes to strengthen financial support for technological innovation. Related-party guarantee is an important credit mechanism of the financial market, but it also brings debt risk to guarantee firms. Attaching importance to the prevention of guarantee debt risk and promoting the guarantee subjects to achieve reciprocity are the key to establishing a long-term mechanism of “being able to guarantee, willing to guarantee, and daring to guarantee”.

This paper takes the Notice on Strengthening the Prevention and Dissolution of Risk in Loans Provided to Firms in the Guarantee Circle as a quasi-natural experiment, and uses 2009-2019 A-share listed company data and the DID method to analyze the impact of related-party guarantee risk management and control on firm innovation and its mechanism. The results show that: (1) The related-party guarantee risk management and control improves firm innovation by avoiding default risk, reducing environmental uncertainty, preventing the management’s myopia, and promoting alliance cooperation. (2) The guarantee circle law can overcome governance defects in the high agency cost of large shareholders and the low institutional ownership, and stimulate firm innovation. (3) The guarantee circle law can form complementary advantages with judicial protection to stimulate innovation, and stimulate substantive innovation better when the insurance market develops well. Thus, we should improve relevant laws to further standardize guarantee information disclosure and business process; strengthen the supervision on large shareholders’ occupation of fund to give play to the role of institutional investors in balancing major shareholders; improve the trial efficiency of guarantee cases, expand the scope of insurance business, and provide relevant data information for risk supervision.

The marginal contributions of this paper are as follows: (1) From a new perspective of the “regulation” on related-party guarantee risk management and control, it offsets the defects of the research in the field of guarantee system and firm innovation. (2) It reveals the impact mechanism of the guarantee circle law promoting firm innovation, which deepens the understanding for the mechanism of the guarantee law promoting innovation. (3) From the perspectives of overcoming governance defects, “prevention in advance” and “relief after the event”, it analyzes how to build a legal business environment to improve the quantity and quality of firm innovation, which expands the relevant theory of “law and finance”.