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

Luo, Pengfei; Wang, Huamao; Yang, Zhaojun

Abstract

© 2015 Elsevier B.V. and Association of European Operational Research Societies (EURO) within the International Federation of Operational Research Societies (IFORS). All rights reserved. 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.

Citation

Luo, P., Wang, H., & Yang, Z. (2016). Investment and financing for SMEs with a partial guarantee and jump risk. European Journal of Operational Research, 249(3), 1161-1168. https://doi.org/10.1016/j.ejor.2015.09.032

• Journal Article Type: Article
• Acceptance Date: Sep 20, 2015
• Online Publication Date: Sep 28, 2015
• Publication Date: 2016-03
• Deposit Date: Apr 7, 2020
• Publicly Available Date: Apr 17, 2020
• Journal: European Journal of Operational Research
• Print ISSN: 0377-2217
• Electronic ISSN: 1872-6860
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 249
• Issue: 3
• Pages: 1161-1168
• DOI: https://doi.org/10.1016/j.ejor.2015.09.032
• Public URL: https://nottingham-repository.worktribe.com/output/4267075
• Publisher URL: https://www.sciencedirect.com/science/article/abs/pii/S0377221715008747?via%3Dihub
• Additional Information: This article is maintained by: Elsevier; Article Title: Investment and financing for SMEs with a partial guarantee and jump risk; Journal Title: European Journal of Operational Research; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.ejor.2015.09.032; Content Type: article; Copyright: Copyright © 2015 Elsevier B.V. and Association of European Operational Research Societies (EURO) within the International Federation of Operational Research Societies (IFORS). All rights reserved.