Syed Walid Reza (University of Waterloo) - Shareholder Wealth Implications of Promoter Personal Guarantees

BOFIT Seminar - Syed Walid Reza (University of Waterloo) - Shareholder Wealth Implications of Promoter Personal Guarantees

Abstract

Personal guarantees are widespread in limited liability corporations. Examining public firms in India, we find that 10% of firms have had guarantees at some point, with the average amount of guaranteed loans exceeding the amount of non-current liabilities. Guarantees help raise capital when financing from traditional sources is low. Using a 2021 Supreme Court decision that made guarantees binding, we document a positive wealth impact for outside shareholders, especially in financially constrained firms. Debt financing and investments decreased subsequently. Overall evidence suggests that firms overinvest with personal guarantee backed loans that adversely impacts outside shareholders.

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