Can loan guarantee promote innovation behaviour in firms? Evidence from Chinese listed firms

Using a loan guarantee contract for credit financing is the primary method for firms to obtain external financial resources. We examine whether obtaining loan guarantees from third parties can promote innovation behaviour, and investigate the underlying mechanism. Using the 2007-2016 data of Chinese listed firms, we find that (i) firms with loan guarantees have lower innovation input but much higher patents output in that very year, (ii) higher the guarantee coverage cannot promote R&D expenditure in that very year and the following year. The results indicate that loan guarantees can promote innovation behaviour because it can ease the financial constraints the debtor facing, rather than the risk sharing mechanism.