Loan Guarantees, Corporate Social Responsibility Disclosure and Audit Fees: Evidence from China
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ORIGINAL PAPER
Loan Guarantees, Corporate Social Responsibility Disclosure and Audit Fees: Evidence from China Fangjun Wang1 · Luying Xu1,2 · Fei Guo3 · Junrui Zhang1 Received: 13 July 2018 / Accepted: 22 February 2019 © Springer Nature B.V. 2019
Abstract This paper examines the relationship between loan guarantees and audit fees as well as the moderating effect of corporate social responsibility (CSR). We find that guaranteeing another entity’s debt significantly increases firms’ own audit fees. However, the disclosure of CSR information attenuates the fee-increasing effects of loan guarantees. A closer examination reveals that the role of CSR is attributable to the information effect rather than the signal effect. Our results are robust to the use of a quasi-natural experiment, a propensity score matching analysis, a Heckman two-stage treatment effect model and alternative proxies. This work makes new contributions to the current understanding of the consequences of loan guarantees, determinants of audit fees and value of CSR disclosure. Keywords Loan guarantee · Corporate social responsibility · Audit pricing
Introduction Due to the late establishment of Chinese stock exchanges in the early 1990s and strict requirements on initial public offerings, public equity financing is relatively inaccessible for most businesses.1 As a result, a large number of companies who seek additional capital source debt financing from the banking sector in China. According to the China Statistical Yearbook (2017), from 2002 to 2016, the proportion of debt financing to social financing was approximately 96.33%, on average, which is equal to 9.44 trillion Chinese * Fangjun Wang [email protected] Luying Xu [email protected] Fei Guo [email protected] Junrui Zhang [email protected] 1
School of Management, Xi’an Jiaotong University, Xi’an, China
2
College of Business, City University of Hong Kong, Hong Kong, China
3
School of Management and Economics, North China University of Water Resources and Electric Power, Zhengzhou, China
Yuan (roughly $1.4 trillion US dollars) per year, indicating its prominence as a financing channel. Given this situation, banks enjoy considerable bargaining power and generally require a third party (i.e., guarantor) to provide a legally enforceable promise to pay for the debt of the primary borrower in case of default in repayment. Considering the strong credit of assurance providers, banks usually regard listed firms as optimal candidates for guarantors. This credit guarantee is beneficial to the secured party (i.e., primary borrower), as it alleviates borrowers’ financing constraints by providing insurance to the lender (Riding and Haines 2001; Beck et al. 2010; Régis and Laurent 2013; Calcagnini et al. 2014). Guarantors by contrast are more likely to suffer losses and experience heightened risk exposure. The commitment of a loan guarantee exacerbates the financial and operational risks faced by guarantors due to joint and several liability contract clauses in the event of defaul
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