Haoyu Gao, Yuting Huang, and Jingyuan Mo
Review of Finance, Volume 30, Issue 1, January 2026, Pages 163–192, https://doi.org/10.1093/rof/rfaf067
In private debt markets, banks mitigate agency conflicts by actively screening and monitoring borrowers. In contrast, dispersed bondholders in public debt markets face significant information asymmetry and lack the incentives and capacity to do so, leaving investors vulnerable to issuer opportunism. This raises a central question: can other intermediaries step in to protect creditors in the bond market? We provide the first empirical evidence that credit guarantors—firms that assumes liability if the issuer fails to repay—can effectively fill this gap. With both their capital and reputation at stake, guarantors have strong incentives to oversee issuers both before and after bonds are issued.
This paper examines whether third-party credit guarantees in China’s corporate bond market reduce default risk and clarifies the underlying mechanisms. Specifically, we investigate whether guarantors influence outcomes primarily through ex-ante screening of safer issuers or via ex-post monitoring once bonds are outstanding. We also analyze how a guarantor’s presence affects firms’ risk-taking behavior.
Using a comprehensive bond-year panel of Chinese corporate bond issuances from 2009 to 2019, we estimate hazard models and document that guaranteed bonds exhibit a 58% lower default risk than non-guaranteed bonds. A Heckman selection model provides no evidence that guarantors systematically select safer issuers. Importantly, the risk-reduction effect of guarantees persists even after controlling for selection on unobservables, suggesting that selection is not the main driver of our findings. Instead, our evidence substantiates a mechanism of active ex-post monitoring. We find that the risk-mitigating effect of guarantees is most pronounced when guarantors’ financial exposure is high—such as when their portfolios are concentrated or when a single bond constitutes a large share of their obligations. Furthermore, guarantees are particularly effective when issuers’ fundamentals deteriorate, their credit ratings are downgraded, or local defaults trigger heightened scrutiny, suggesting that guarantors intensify monitoring in response to rising risk.
We also find that guaranteed bonds include significantly fewer protective covenants, consistent with guarantees substituting for covenant-based monitoring. At the issuer level, firms backed by guarantors adopt more conservative practices, including reduced over-investment and lower excessive leverage. These results further underscore the monitoring role of guarantors in restraining issuers’ risk-taking behavior, thereby contributing to a subsequent decline in default risk.
Our findings offer several important contributions. First, we provide the first empirical evidence that credit guarantors serve as effective monitors in public debt markets. Unlike rating agencies, a guarantor’s direct financial exposure sustains their monitoring incentives throughout a bond’s life, helping to mitigate free-rider problems and information asymmetry among dispersed creditors. The findings also clarify how guarantees differ from collateral: whereas collateral reallocates recovery value ex-post, guarantors actively reduce default risk ex-ante through continuous assessment and intervention. By documenting these mechanisms, this paper sheds new light on the functioning of China’s corporate bond market—the world’s second-largest—and offers broader lessons for emerging markets seeking to strengthen their debt market institutions.