Growth option, debt maturity and cash reserves with bank-tax-interaction

Pengfei Luo, Biao Chen and Fengjun Liu

The North American Journal of Economics and Finance, 2020, vol. 52, issue C

Abstract: In this paper, we assume a small and micro enterprise(SME, henceforth) invests in a project, of which the investment cost is funded by the private lending and the bank-tax-interaction (BTI, henceforth). We build a tractable model of optimal investment, liquidity and default decisions based on cash flows with liquidity shocks and profitability uncertainty. In contrast to the case with pure private lending, we discover that BTI delays investment and increases the firm value. Furthermore, BTI causes the SME to retain more cash reserves. We also find that the SME prefers to select the BTI as the main financing policy under the higher liquidity risk and small profitability uncertainty. Besides, the impact of debt maturity on financial policies with BTI depends on liquidity shock.

Keywords: Investment; Bank-tax-interaction; Debt maturity; Cash reserves (search for similar items in EconPapers)
JEL-codes: G11 G32 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:52:y:2020:i:c:s106294081930590x

DOI: 10.1016/j.najef.2020.101144

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