Abstract
This paper analyzes the value of guarantee by managing shareholders in Japan using real options approach. Managers of mid and small sized corporations are able to choose whether to be a guarantor or not when borrowing money from financial institutions. When a manager does not be a guarantor, higher interests rate would be offered. This paper shows that the guarantee is a portfolio of call options and a risk-free asset. This paper finds out that the value of guarantee by the managing shareholders is associated with risk free rates, wealth level of managers, and underlying risks of the corporation the managing shareholders engage. Interests rates offered could depend on the wealth level of the managers when managers are guarantors to the debts.
