In this study, we develop a set of models to analyze corporate loan guarantee to better understand the Korean government’s regulation policies. We ﬁnd that corporate loan guarantees are eﬃciency-neutral under a set of ideal economic conditions characterized by perfect and symmetric information, no agency problems, and no governmental interference in private ﬁnancial contracts. In reality, though, corporate loan guarantees have negative as well as positive eﬀects on ﬁrms’ behavior. Negative eﬀects arise from principal-agent problems as well as government interferences in private ﬁnancial contracts. In the presence of information asymmetry, a positive eﬀect of corporate loan guarantee may result by making good use of the fact that the guarantor ﬁrm has more information than the lending bank with regards to the borrowing ﬁrm’s investment project. Speciﬁcally, loan guarantee contracts can function as a signalling mechanism enhancing the eﬃciency in investment fund allocation.