Innovative credit guarantee schemes with equity-for-guarantee swaps

Pengcheng Song, Hai Zhang, Qin Zhao

Research output: Contribution to journalArticlepeer-review


Small and medium-sized enterprises (SMEs) faces much more severe financial constraints compared to large mature 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. Having provided a thorough analysis of the effectiveness of the traditional CGSs, we 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 alleviates SMEs' severe financial constraints as it transfers the information asymmetry between lenders and SMEs to that between insurers and SMEs We investigate how asset prices vary across time under the EGS contract and analyze insurers' risk exposure, i.e. value-at-risk (VaR) and expected shortfall (ES), of participating in the EGS contract. Consistent with pecking order theory, SMEs tend to use debt financing first despite the benefit of a boosted growth rate from private equity financing in our model.
Original languageEnglish
Article number101809
Number of pages12
JournalInternational Review of Financial Analysis
Early online date15 Jun 2021
Publication statusE-pub ahead of print - 15 Jun 2021


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


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