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Entrepreneurial investment and financing with third-party guarantees under present-biased preferences

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  • Gan, Liu
  • Xia, Xin
  • Xu, Mingyu

Abstract

Some guarantors in China promise to make equity investments to finance entrepreneurial firms’ future expansion investment, beyond guaranteeing their existing bank debt. This paper employs a real options model to study entrepreneurial firms’ expansion investment decisions, the valuation of the fair guarantee premium, and guarantors’ equity investment policies when entrepreneurs exhibit present-biased preferences. We show that as the degree of present bias increases, entrepreneurial firms invest later and guarantors make smaller equity investments. We demonstrate an inverted U-shaped relationship between the fair guarantee premium and the degree of present bias. Finally, present-biased entrepreneurs’ optimal capital structure decisions are discussed.

Suggested Citation

  • Gan, Liu & Xia, Xin & Xu, Mingyu, 2023. "Entrepreneurial investment and financing with third-party guarantees under present-biased preferences," Finance Research Letters, Elsevier, vol. 55(PA).
    • Handle: RePEc:eee:finlet:v:55:y:2023:i:pa:s1544612323002143
    DOI: 10.1016/j.frl.2023.103841
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    References listed on IDEAS

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    More about this item

    Keywords

    Expansion investment; Equity investment; Fair guarantee premium; Present-biased preferences;
    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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