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Investment and financing for SMEs with bank-tax interaction and public-private partnerships

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  • Luo, Pengfei
  • Song, Dandan
  • Chen, Biao

Abstract

In this paper, we consider a small- and micro-sized enterprise (SME) with assets-in-place invests a project. Especially, we assume that the fund needed by the investment are shared by the government’s direct investment through public-private partnerships (PPPs) and the bank-tax interaction (BTI), which is a financial innovation instrument to solve the financing problem encountered by the SMEs. We address the pricing of corporate securities and optimal investment strategies. By providing a comparison with the pure private lending, we discover that the BTI makes the investment much cheaper and more attractive, and therefore mitigates the problem of under-investment in unstable markets. In addition, the BTI can increase the total firm value, reduce the leverage ratio and bankruptcy probability. The credit line of the BTI contract increases with the factors that influence the loan structure of the SME, such as the volatility, the tax rate, the investment cost sharing and the credit multiple. Most importantly, there exists an optimal investment cost sharing, such that the agency cost between SMEs and the government reaches zero due to the direct investment through PPPs.

Suggested Citation

  • Luo, Pengfei & Song, Dandan & Chen, Biao, 2020. "Investment and financing for SMEs with bank-tax interaction and public-private partnerships," International Review of Economics & Finance, Elsevier, vol. 65(C), pages 163-172.
    • Handle: RePEc:eee:reveco:v:65:y:2020:i:c:p:163-172
    DOI: 10.1016/j.iref.2019.10.007
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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. Hua Song & Yudong Yang & Zheng Tao, 2020. "How different types of financial service providers support small- and medium- enterprises under the impact of COVID-19 pandemic: from the perspective of expectancy theory," Frontiers of Business Research in China, Springer, vol. 14(1), pages 1-27, December.
    3. 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).
    4. Chen, Biao & Jiang, Jinglu & Zhu, Nanhui, 2023. "Optimal capital structure and credit policy with bank-tax-guarantee," Finance Research Letters, Elsevier, vol. 58(PA).

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    More about this item

    Keywords

    Investment and financing; Small- and micro-sized enterprise; Bank-tax interaction; Agency cost; D21; G11; G32;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • 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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