Innovative Credit Guarantee Schemes with Equity-for-Guarantee Swaps

Pengcheng Song, Hai Zhang, Qin Zhao

Research output: Working paper

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Abstract

Small and medium-sized enterprises (SMEs) faces much severer financial constraints 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 constraints in a more effective way. We show that EGS effectively reduces information asymmetry between lenders and SMEs and alleviates SMEs' severe financial constraints. 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 constraints, then the SME issues more debt when it is less financially constrained.
Original languageEnglish
Place of PublicationGlasgow
PublisherUniversity of Strathclyde
Pages1-28
Number of pages28
Publication statusPublished - 15 Jul 2020

Keywords

  • SMEs
  • equity-for-guarantee swap
  • financial constraints
  • risk management

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