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

Using a comprehensive dataset collected by the Federal Reserve, I find that over one-third of corporate loans issued by US 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 find that the existence of a third-party credit guarantee is negatively related to loan risk, loan rate, and loan delinquency. Third party credit guarantees alleviate the effect of collateral constraints in credit m...