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The effect of affiliate loan guarantees on cost of debt: Evidence from Korea

Title
The effect of affiliate loan guarantees on cost of debt: Evidence from Korea
Authors
Woo Y.-S.
Ewha Authors
우용상
SCOPUS Author ID
우용상scopus
Issue Date
2017
Journal Title
Journal of Applied Business Research
ISSN
0892-7626JCR Link
Citation
Journal of Applied Business Research vol. 33, no. 5, pp. 993 - 998
Keywords
Contingent liabilitiesCost of debtLoan guarantees
Publisher
CIBER Institute
Indexed
SCOPUS scopus
Document Type
Article
Abstract
A loan guarantee occurs when a company guarantees payment of an affiliate’s loan. Conflicting arguments regarding loan guarantees provided to affiliates have prevailed. First, some suggest that loan guarantees provided to affiliates would decrease firm value because they are contingent liabilities (Shim, 1996; Berkman, Cole & Fu, 2009). Second, others suggest firm value is high when the amount of loan guarantees provided to affiliates is large because loan guarantees would be regarded as a positive indicator of future cash flow (Lee, 2005). The purpose of this study was to present additional empirical evidence of these arguments. The result of this study showed that cost of debt is high when the amount of loan guarantees provided to affiliates is large. This result indicates that creditors demand higher risk premiums when the amount of loan guarantees provided to affiliates is large because they regard loan guarantees as contingent liabilities. Therefore, this result supports the assertion that loan guarantees decrease firm value. © 2017, CIBER Institute. All rights reserved.
DOI
10.19030/jabr.v33i5.10021
Appears in Collections:
경영대학 > 경영학전공 > Journal papers
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