Abstract
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 language | English |
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Pages (from-to) | 1347-1375 |
Number of pages | 30 |
Journal | European Financial Management |
Volume | 28 |
Issue number | 5 |
Early online date | 15 Nov 2021 |
DOIs | |
Publication status | E-pub ahead of print - 15 Nov 2021 |
Keywords
- asymmetric information
- equity-for-guarantee swap
- least-cost equilibrium
- real option
- SME financing