Growth option,debt maturity and cash reserves with bank-tax-interaction |
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| Institution: | 1. School of Finance and Statistics, Hunan University, Changsha, China;2. School of Finance, Shanghai University of Finance and Economics, Shanghai, China;3. Shanghai Key Laboratory of Financial Information Technology, China;1. Department of Money and Banking, National Kaohsiung University of Science and Technology, Taiwan, ROC;2. Department of Finance, National Chung Hsing University, Taiwan, ROC;3. Department of Accounting, National Chengchi University, Taiwan, ROC;1. China Finance Research Institute, Southwestern University of Finance and Economics, Chengdu 610074, China;2. Western China Economic Research Center, Southwestern University of Finance and Economics, Chengdu 610074, China;3. Research Center for Central China Economic and Social Development, and School of Economics & Management, Nanchang University, 999 Xuefu Road, Nanchang 330031, China;1. Ningbo University, China;2. University of Las Palmas de Gran Canaria, Spain;1. Zhejiang Provincial Committee of the Communist Party of China, Hangzhou 310018, China;2. School of Finance, Zhejiang University of Finance and Economics, Hangzhou 310018, China;3. Collaborative Innovation Center for Wealth Management and Quantitative Investment, Zhejiang University of Finance and Economics, Hangzhou 310018, China |
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| Abstract: | In this paper, we assume a small and micro enterprise(SME, henceforth) invests in a project, of which the investment cost is funded by the private lending and the bank-tax-interaction (BTI, henceforth). We build a tractable model of optimal investment, liquidity and default decisions based on cash flows with liquidity shocks and profitability uncertainty. In contrast to the case with pure private lending, we discover that BTI delays investment and increases the firm value. Furthermore, BTI causes the SME to retain more cash reserves. We also find that the SME prefers to select the BTI as the main financing policy under the higher liquidity risk and small profitability uncertainty. Besides, the impact of debt maturity on financial policies with BTI depends on liquidity shock. |
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| Keywords: | Investment Bank-tax-interaction Debt maturity Cash reserves G11 G32 |
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