The Effects of PF Loan Guarantees on the Firm Value and Cost of Debt
Asian Tax Journal Vol. 17 No. 1 (2016), pp. 9-33
Abstract
In Korea, Construction firms usually guarantee PF loan which Developers take out. PF loan guarantees are classified as contingent liabilities and reported in footnote instead of being recorded as liabilities in balance sheet. This study examines the effects of PF loan guarantees of construction firms on the firm value and the cost of debt. The sample consists of 219(164) construction firms/years from 2009 to 2013. The stock prices and accounting data are selected from the database TS 2000 by Korean Listed Companies Association. PF loan guarantee balances are from annual business report through hand collecting. The empirical result shows that PF loan guarantees have a negative effect on the stock prices of construction firms. This result indicates that even though construction firms do not report PF loan guarantees as liabilities in balance sheet. investors treat them as a part of liabilities of construction firms. Also, the result reveals that PF loan guarantees are positively associated with the cost of debt, but the coefficients are statistically insignificant. The insignificance may come from the inaccuracy in measuring the cost of debt
Keywords
- Financial Guarantee Liability
- Contingent Liability
- Project Financing
- PF Loan Guarantee