Why Over-Guarantee Crises Always Cluster? Exploring Peer Effect in Financial Distress
Journal of Organizational Change Management
ISSN: 0953-4814
Article publication date: 4 October 2022
Issue publication date: 8 December 2022
Abstract
Purpose
This paper attributes the clustered occurrence of over-guarantee crises of Chinese listed firms to behavioural interactions among them when engaged in guarantee decisions, verifying the existence of the peer effect (PE) and its role in the formation mechanism of such crises.
Design/methodology/approach
Reviewing the literature, the authors constructed a panel dataset of Chinese listed firms from 2011 to 2019 to empirically verify two types of PE by constructing industrial and regional PE indicators. The authors conduct grouped regressions according to firm heterogeneity and managers’ individual characteristics to explain the motives for the over-guaranteeing PE and also analysed the interaction between the financial market and the PE to reveal the external governance mechanism.
Findings
The authors find that the over-guarantee behaviour of Chinese listed firms exhibits strong industrial and regional correlations, which may lead to guarantee crises clustering. Firms with lower information quality, smaller asset size, and higher managerial overconfidence will be more likely to be influenced by other listed firms to over-guarantee. A favourable financial market environment can effectively inhibit listed firms from imitating the guaranteeing behaviour of peer firms.
Research limitations/implications
This study’s results challenge the traditional theoretical perspective of independent financial decision-making, describe the interaction among listed firms in decision-making, and expand the existing theoretical literature on over-guaranteeing. The stickiness of guarantee behaviour may affect the accuracy of the authors’ estimations, and the differences between the industrial and regional PE require further research.
Practical implications
The PE of over-guaranteeing shows that a single firm has a “spill-over effect” on the guarantee decisions of other firms in the same industry or region. Improving the information environment of listed firms financing decision-making and establishing a more demanding guarantee access mechanism may reduce this dependence on listed firms’ decisions. Firms should also appropriately strengthen decision-making constraints on managers to avoid istortions in financial decisions due to managers’ personal cognitive biases.
Originality/value
Using PE theory, the authors explain the influence mechanisms of financial distress of Chinese listed firms due to industrial and regional clustering of over-guarantee behaviour from the perspective of behavioural interaction.
Keywords
Citation
Xu, P. and Wu, B. (2022), "Why Over-Guarantee Crises Always Cluster? Exploring Peer Effect in Financial Distress", Journal of Organizational Change Management, Vol. 35 No. 7, pp. 1025-1046. https://doi.org/10.1108/JOCM-01-2022-0017
Publisher
:Emerald Publishing Limited
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