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Growth option, debt maturity and cash reserves with bank-tax-interaction

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  • Luo, Pengfei
  • Chen, Biao
  • Liu, Fengjun

Abstract

In this paper, we assume a small and micro enterprise(SME, henceforth) invests in a project, of which the investment cost is funded by the private lending and the bank-tax-interaction (BTI, henceforth). We build a tractable model of optimal investment, liquidity and default decisions based on cash flows with liquidity shocks and profitability uncertainty. In contrast to the case with pure private lending, we discover that BTI delays investment and increases the firm value. Furthermore, BTI causes the SME to retain more cash reserves. We also find that the SME prefers to select the BTI as the main financing policy under the higher liquidity risk and small profitability uncertainty. Besides, the impact of debt maturity on financial policies with BTI depends on liquidity shock.

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  • Luo, Pengfei & Chen, Biao & Liu, Fengjun, 2020. "Growth option, debt maturity and cash reserves with bank-tax-interaction," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:ecofin:v:52:y:2020:i:c:s106294081930590x
    DOI: 10.1016/j.najef.2020.101144
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    Cited by:

    1. Chen, Biao & Yan, Haoyang & Zhu, Nanhui, 2023. "Investment and financing for SMEs with bank-tax-guarantee," Economics Letters, Elsevier, vol. 231(C).

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    More about this item

    Keywords

    Investment; Bank-tax-interaction; Debt maturity; Cash reserves;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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