The value of guarantor monitoring: evidence from bond defaults in China

Abstract

Using a bond–year panel dataset, we show that external credit guarantors can mitigate default risk in the corporate bond market, and the observed effects cannot be fully attributed to pre-issuance screening. Consistent with a monitoring channel, we explore the post-issuance dynamics and find that the risk-reduction effect of guarantees is significantly stronger when guarantors face greater risk exposure or when issuers experience post-issuance financial deterioration. We further demonstrate that guarantees act as substitutes for covenant-based monitoring and promote disciplined firm behavior: Guaranteed firms exhibit reduced risk-taking, reflected in lower levels of overinvestment and excessive leverage. Together, these findings underscore the delegated monitoring role of guarantors in mitigating agency conflicts between issuers and investors in public debt markets.