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Optimal investment and financing with a bank-tax-interaction

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  • Chen, Biao
  • Yang, Jinqiang

Abstract

In this paper, we study the optimal investment and financing decisions with private lending and a newly created bank-tax-interaction(BTI, henceforth) which the bank provides loan to small and micro enterprizes (SMEs, henceforth) based on theirs historical tax payment. In contrast to the case with pure private lending, we discover that the BTI can increase firms’ value, the tax revenue and accelerate investment, firms with more profitable growth opportunities and higher cost of private lending will benefit more from BTI financing. Furthermore, an increasing in the credit multiplier reduces the incentive for corporate tax evasion when the minimum degree of tax payment is higher.

Suggested Citation

  • Chen, Biao & Yang, Jinqiang, 2020. "Optimal investment and financing with a bank-tax-interaction," Finance Research Letters, Elsevier, vol. 35(C).
    • Handle: RePEc:eee:finlet:v:35:y:2020:i:c:s1544612319300728
    DOI: 10.1016/j.frl.2019.08.030
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    References listed on IDEAS

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    1. Goldstein, Robert & Ju, Nengjiu & Leland, Hayne, 2001. "An EBIT-Based Model of Dynamic Capital Structure," The Journal of Business, University of Chicago Press, vol. 74(4), pages 483-512, October.
    2. Leland, Hayne E, 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-1252, September.
    3. Yang, Zhaojun & Zhang, Hai, 2013. "Optimal capital structure with an equity-for-guarantee swap," Economics Letters, Elsevier, vol. 118(2), pages 355-359.
    4. Leland, Hayne E & Toft, Klaus Bjerre, 1996. "Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Journal of Finance, American Finance Association, vol. 51(3), pages 987-1019, July.
    5. Mauer, David C. & Sarkar, Sudipto, 2005. "Real options, agency conflicts, and optimal capital structure," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1405-1428, June.
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    Cited by:

    1. Hyeongtae Cho & SungMan Yoon, 2023. "Do Governmental Tax Reliefs for Investment Lead to Investment Efficiency and Sustainability for SMEs? Evidence From South Korea," SAGE Open, , vol. 13(1), pages 21582440231, February.
    2. Chen, Biao & Jiang, Jinglu & Zhu, Nanhui, 2023. "Optimal capital structure and credit policy with bank-tax-guarantee," Finance Research Letters, Elsevier, vol. 58(PA).
    3. Chen, Biao & Yan, Haoyang & Zhu, Nanhui, 2023. "Investment and financing for SMEs with bank-tax-guarantee," Economics Letters, Elsevier, vol. 231(C).
    4. Lu, Ting & Luo, Pengfei, 2024. "Bank-tax-interaction, carbon emission reduction investment and financing decisions for SMEs," International Review of Financial Analysis, Elsevier, vol. 95(PB).

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    More about this item

    Keywords

    Bank-tax-interaction; Credit multiplier; Investment;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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