Will Capital Structure and Performance Affect External Financial Guarantee Behavior?

Many empirical studies find in Chinese capital market, companies providing external guarantees have higher asset-liability ratio and worse operating performance( Liu and Zheng, 2005; Jian and Xu, 2012; etc. ). Their studies suggest that the underlying reasons are the expropriation of minority shareholder wealth by controlling block holders. But seldom theoretical works can explain this phenomenon. This paper constructing a theoretical based on the classical economic theory of supply and demand and the theory of Capital structure. Our model shows that guarantors with higher debt ratio and lower performance provide guarantees with lower price; and there is an optimal guarantor for each specific debtor, rather than the guarantors with lowest default risk.