SMEs investment and financing under asymmetric information

Yao Wang, Hai Zhang, Zhiming Zhao

Research output: Working paper

Abstract

We consider investment timing and financing decisions for finance constraint small and medium-sized enterprises (SMEs) in a dynamic setting with asymmetric information. To effectively alleviate the borne financial constraint, SMEs finances a risky project with the help of innovative contract, equity-for-guarantee swap (EGS), within which it secures guaranteed debt at the expense of equity dilution to an outside insurer. We show that firms with high cash flow can credibly signal their type to outsider insurers using the timing of investment and offering guarantee compensation package as well. In addition, asymmetric information indeed induces high-type firms speed up investment, leads to higher guarantee costs. Our findings support that EGS not only mitigates financing constraints but also reduces investment distortion for SMEs under information asymmetry. Finally, our model generates testable implications with respect to SMEs investment and financing decisions.
LanguageEnglish
Place of PublicationGlasgow
PublisherUniversity of Strathclyde
Pages1-25
Number of pages25
Publication statusPublished - 6 Jul 2019

Fingerprint

Guarantee
Small and medium-sized enterprises
Financing
Asymmetric information
Equity
Swaps
Financing decisions
Finance
Insurer
Compensation packages
Information asymmetry
Dilution
Expenses
Investment decision
Costs
Financial constraints
Debt
Financing constraints
Outsider
Cash flow

Keywords

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

Cite this

Wang, Y., Zhang, H., & Zhao, Z. (2019). SMEs investment and financing under asymmetric information. (pp. 1-25). Glasgow: University of Strathclyde.
Wang, Yao ; Zhang, Hai ; Zhao, Zhiming. / SMEs investment and financing under asymmetric information. Glasgow : University of Strathclyde, 2019. pp. 1-25
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Wang, Y, Zhang, H & Zhao, Z 2019 'SMEs investment and financing under asymmetric information' University of Strathclyde, Glasgow, pp. 1-25.

SMEs investment and financing under asymmetric information. / Wang, Yao; Zhang, Hai; Zhao, Zhiming.

Glasgow : University of Strathclyde, 2019. p. 1-25.

Research output: Working paper

TY - UNPB

T1 - SMEs investment and financing under asymmetric information

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AU - Zhao, Zhiming

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N2 - We consider investment timing and financing decisions for finance constraint small and medium-sized enterprises (SMEs) in a dynamic setting with asymmetric information. To effectively alleviate the borne financial constraint, SMEs finances a risky project with the help of innovative contract, equity-for-guarantee swap (EGS), within which it secures guaranteed debt at the expense of equity dilution to an outside insurer. We show that firms with high cash flow can credibly signal their type to outsider insurers using the timing of investment and offering guarantee compensation package as well. In addition, asymmetric information indeed induces high-type firms speed up investment, leads to higher guarantee costs. Our findings support that EGS not only mitigates financing constraints but also reduces investment distortion for SMEs under information asymmetry. Finally, our model generates testable implications with respect to SMEs investment and financing decisions.

AB - We consider investment timing and financing decisions for finance constraint small and medium-sized enterprises (SMEs) in a dynamic setting with asymmetric information. To effectively alleviate the borne financial constraint, SMEs finances a risky project with the help of innovative contract, equity-for-guarantee swap (EGS), within which it secures guaranteed debt at the expense of equity dilution to an outside insurer. We show that firms with high cash flow can credibly signal their type to outsider insurers using the timing of investment and offering guarantee compensation package as well. In addition, asymmetric information indeed induces high-type firms speed up investment, leads to higher guarantee costs. Our findings support that EGS not only mitigates financing constraints but also reduces investment distortion for SMEs under information asymmetry. Finally, our model generates testable implications with respect to SMEs investment and financing decisions.

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Wang Y, Zhang H, Zhao Z. SMEs investment and financing under asymmetric information. Glasgow: University of Strathclyde. 2019 Jul 6, p. 1-25.