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Investment and financing for SMEs with a partial guarantee and jump risk

Luo, Pengfei, Wang, Huamao, Yang, Zhaojun (2016) Investment and financing for SMEs with a partial guarantee and jump risk. European Journal of Operational Research, 249 (3). pp. 1161-1168. ISSN 0377-2217. (doi:10.1016/j.ejor.2015.09.032) (KAR id:44795)

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http://dx.doi.org/10.1016/j.ejor.2015.09.032

Abstract

We consider a small- and medium-sized enterprise (SME) with a funding gap intending to invest in a project, of which the cash flow follows a double exponential jump-diffusion process. In contrast to traditional corporate finance theory, we assume the SME is unable to get a loan directly from a bank and hence it enters into a partial guarantee agreement with an insurer and a lender. Utilizing a real options approach, we develop an investment and financing model with a partial guarantee. We explicitly derive the pricing and timing of the option to invest. We find that if the funding gap rises, the option value decreases but its investment threshold first declines and then increases. The larger the guarantee level, the lower the option value and the later the investment. The optimal coupon rate decreases with project risk and a growth of the guarantee level can effectively reduce agency conflicts.

Item Type: Article
DOI/Identification number: 10.1016/j.ejor.2015.09.032
Uncontrolled keywords: Finance; Investment analysis; Guarantee level; Real options; Double exponential jump-diffusion process
Subjects: H Social Sciences > HG Finance
Divisions: Faculties > Sciences > School of Mathematics Statistics and Actuarial Science
Faculties > Social Sciences > Kent Business School > Accounting and Finance
Depositing User: Huamao Wang
Date Deposited: 18 Nov 2014 12:03 UTC
Last Modified: 29 Jan 2020 04:06 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/44795 (The current URI for this page, for reference purposes)
Wang, Huamao: https://orcid.org/0000-0003-0436-826X
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