SME financing with a combination contract of investment and guarantee

Liu Gan and Xin Xia

Finance Research Letters, 2022, vol. 50, issue C

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.

Keywords: Uncertainty; Financial innovation; Investment; Modernization opportunity (search for similar items in EconPapers)
JEL-codes: G13 G32 G33 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:50:y:2022:i:c:s1544612322004998

DOI: 10.1016/j.frl.2022.103320

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