Investment and Financing for SMEs with a Partial Guarantee and Jump Risk

Luo, Pengfei; Wang, Huamao; Yang, Zhaojun

doi:10.2139/ssrn.2561731

Cited by 7 publications

(6 citation statements)

References 23 publications

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“…Tang et al (2016) considered the use of partially guaranteed price contracts in an environment with price uncertainty, but no yield uncertainty. Luo et al (2016) used a real option approach and developed an investment and financing model with a partial guarantee. Yan et al (2016) and Lu et al (2019) designed a partial credit guarantee contract in the supply chain where a manufacture offers a credit guarantee for a capital-constrained retailer.…”

Section: Literature Reviewmentioning

confidence: 99%

Risk control mechanisms of third-party guarantee when financing newsvendor

Huang

Chen

et al. 2021

RAIRO-Oper. Res.

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Two risk control mechanisms, namely, cash deposit, and loan limits based on retained profit or maximum expected guarantor profit, are developed for capital-constrained newsvendor financing. Results show that with a large initial capital or mortgage asset, the newsvendor reduces the order quantity to avoid bankruptcy risk. Under the risk control mechanism with a cash deposit, the guarantor gains greater profit when the newsvendor has a low initial capital. Setting a loan limit is thus an effective mechanism for newsvendors to not only reduce the bankruptcy risk, but also increase the guarantee profit. Numerical experiments also show that, compared with the risk control mechanism based on maximum expected profit, loan limits based on retained profit is more beneficial for the newsvendor, guarantee, and the bank.

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Section: Literature Reviewmentioning

confidence: 99%

Risk control mechanisms of third-party guarantee when financing newsvendor

Huang

Chen

et al. 2021

RAIRO-Oper. Res.

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“…It is true that a revolving line of credit would do so also without incurring extra costs. However, if the firm is a small business, adjustment by a revolving line of credit is generally unfeasible, see Luo, Wang, and Yang () and Wang, Yang, and Zhang (). In addition, as reported by Leland (), in the absence of transactions costs, restructuring by continuous readjustments of debt coupons would seem to be desirable to maximize total firm value as cash flow changes.…”

Section: Literature Review and Intuitive Analysismentioning

confidence: 99%

Contingent capital with repeated interconversion between debt‐ and equity‐like instruments

Cai

Yang

Zhao

2018

Euro Fin Management

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This paper introduces a new form of contingent capital, contingent convertible securities (CCSs), which might repeatedly convert between debt‐ and equity‐like instruments depending on financial conditions. We derive explicit prices of corporate securities, assuming the cash flow is modeled as a geometric Brownian motion. We present an explicit value of the increased tax shields due to CCSs. We provide an explicit optimal capital structure when CCSs are issued and interestingly, the ratio of the optimal straight bond coupon to CCS coupon is constant and independent of the firm's financial conditions. All the conclusions hold true also for contingent convertibles.

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“…The operational design apparently influence the cost and effectiveness of differential CGSs (Honohan, 2010). To strength CGS, an innovative instrument called Equity for Guarantee Swap (EGS) has been proposed (Yang and Zhang, 2013;Wang et al, 2015;Liu et al, 2016;Luo et al, 2016;Tang and Yang, 2017). An EGS is a three-party CGS agreement among a bank, a insurer/guarantee company, and an SME, where the SMEr obtains a loan from the bank and, if the SME defaults on the loan, the insurer must pay all the outstanding interest and principal to the bank.…”

Section: Introductionmentioning

confidence: 99%

Innovative Credit Guarantee Schemes with equity-for-guarantee swaps

Song

Hai

Zhao

2021

International Review of Financial Analysis

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Small and medium-sized enterprises (SMEs) faces much severer financial constraint compared to large companies and it is more vulnerable to market imperfection. To alleviate SMEs' financial constraints, Public Credit Guarantee Schemes (CGSs) have been introduced and widely used around the world. We first provide a thorough analysis of the effectiveness of the traditional CGSs and then introduce an innovative financing contract, referred to as equity-for-guarantee swap (EGS), with the aim of reducing SMEs' financial constraint in a more effective way. We show that EGS effectively reduces information asymmetry between lenders and SMEs and alleviates SMEs' severe financial constraint. We further investigate the impact of maturity on asset prices under EGS contract and analyse the value-at-risk (VAR) and expected shortfall (ES) of the insurer's risk exposure when participating in the EGS contract. Consistent with pecking order theory, an extension of our model shows that an SME tends to use equity financing first when it faces much severer financial constraint, then the SME issues more debt when it is less financially constrained.

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Investment and Financing for SMEs with a Partial Guarantee and Jump Risk

Abstract: The version in the Kent Academic Repository may differ from the final published version. Users are advised to check http://kar.kent.ac.uk for the status of the paper. Users should always cite the published version of record.

Cited by 7 publications

References 23 publications

Risk control mechanisms of third-party guarantee when financing newsvendor

Risk control mechanisms of third-party guarantee when financing newsvendor

Contingent capital with repeated interconversion between debt‐ and equity‐like instruments

Innovative Credit Guarantee Schemes with equity-for-guarantee swaps

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