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SME financing with a combination contract of investment and guarantee

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  • Gan, Liu
  • Xia, Xin

Abstract

A combination contract of investment and guarantee (IGC) is a financial innovation developed to overcome the financing constraints of small and medium-sized enterprises (SMEs) in China. This paper develops a dynamic structural model where SMEs are financed with IGCs and face market and technological uncertainty. We show that as market or technological uncertainty increases, guarantee companies tend to invest in less equity in SMEs and require a larger guarantee cost from entrepreneurs. The success of entrepreneurs and guarantee companies that enter into an IGC is more likely when market uncertainty is moderate and the entrepreneur’s bargaining power is relatively low.

Suggested Citation

  • Gan, Liu & Xia, Xin, 2022. "SME financing with a combination contract of investment and guarantee," Finance Research Letters, Elsevier, vol. 50(C).
    • Handle: RePEc:eee:finlet:v:50:y:2022:i:c:s1544612322004998
    DOI: 10.1016/j.frl.2022.103320
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    References listed on IDEAS

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    Cited by:

    1. Yang, Zeyu & Zhuo, Jiayi & Zhang, Yuqian, 2024. "Risk management and optimal investment with inalienable human capital," Finance Research Letters, Elsevier, vol. 61(C).
    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. Liu, Xiang & Yang, Zhaojun, 2023. "Security token offerings versus loan guarantees for risk-averse entrepreneurs under asymmetric information," Finance Research Letters, Elsevier, vol. 57(C).

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    More about this item

    Keywords

    Uncertainty; Financial innovation; Investment; Modernization opportunity;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • 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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