SME investment and financing under asymmetric information

Yao Wang, Hai Zhang, Zhiming Zhao

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)


We investigate the investment timing and financing decisions of financially constrained small and medium-sized enterprises (SMEs) in a real-option setting with asymmetric information. 'Bad' firms can sell over-priced securities by mimicking in a pooling equilibrium. However, 'good' firms can separate from bad firms by imposing an adverse selection cost for mimicry only when the benefit of being recognized as the 'good' type outweighs the investment distortion costs. Further, asymmetric information induces good firms to accelerate investment, leading to investment distortion and higher guarantee costs. Equity-for-guarantee swap not only mitigates SMEs' financing constraints but also reduces the investment and finance distortions.

Original languageEnglish
Pages (from-to)1347-1375
Number of pages30
JournalEuropean Financial Management
Issue number5
Early online date15 Nov 2021
Publication statusE-pub ahead of print - 15 Nov 2021


  • asymmetric information
  • equity-for-guarantee swap
  • least-cost equilibrium
  • real option
  • SME financing


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