Determinants of the guarantee circles: The case of Chinese listed firms

China's external capital market has been developing rapidly since the establishment of its stock markets. However, financing from the internal capital market, especially through the guarantee system provided by other associated firms (the guarantee circle), remains significant for some Chinese firms. We analyze the importance associated with the guarantee system in China with a focus on the macro and micro determinants that affect Chinese firms' participation in the guarantee circle. Our findings suggest that both macroeconomic and microeconomic factors have significant impact on a firm's involvement in the guarantee circle. Firms in regions with higher economic growth, less developed banking system and worse legal protection are more likely to receive guarantee from firms associated with the controlling shareholders. On the other hand, firms controlled by the state are less likely to receive guarantee but more likely to provide guarantee, while firms with alternative financing sources are more likely to provide guarantee. Firms within a complex group with more pyramidal layers are more likely to get involved in the guarantee circle, either as a guarantor or a guarantee. Our findings have implications to general guarantee systems with the presence of agency and moral hazard problems.