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

Luo, Pengfei; Wang, Huamao; Yang, Zhaojun

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Authors

Pengfei Luo

Zhaojun Yang



Contributors

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.

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
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.

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