Publication Type

Journal Article

Version

publishedVersion

Publication Date

7-2021

Abstract

Purpose: Many governments are taking measures in support of small and medium-sized enterprises (SMEs) to mitigate the economic impact of the COVID-19 outbreak. This paper presents a theoretical model for evaluating various government measures, including insurance for bank loans, interest rate subsidy, bridge loans and relief of tax burdens. Design/methodology/approach: This paper distinguishes a firm's intrinsic value and book value, where a firm can lose its intrinsic value when it encounters cash-flow crunch. Wang transform is applied to (1) calculating the appropriate level of interest rate subsidy payable to incentivize banks to issue more loans to SMEs and to extend the loan maturity of current debt to the SMEs, (2) describing the frailty distribution for SMEs and (3) defining banks' underwriting capability and overlap index in risk selection. Findings: Government support for SMEs can be in the form of an appropriate level of interest rate subsidy payable to incentivize banks to issue more loans to SMEs and to extend the loan maturity of current debt to the SMEs. Research limitations/implications: More available data on bank loans would have helped strengthen the empirical studies. Practical implications: This paper makes policy recommendations of establishing policy-oriented banks or investment funds dedicated to supporting SMEs, developing risk indices for SMEs to facilitate refined risk underwriting, providing SMEs with long-term tax relief and early-stage equity-type investments. Social implications: The model highlights the importance of providing bridge loans to SMEs during the COVID-19 disruption to prevent massive business closures. Originality/value: This paper provides an analytical framework using Wang transform for analyzing the most effective form of government support for SMEs.

Keywords

COVID-19, SME, Bank loan, Government subsidy, Wang transform

Discipline

Economic Theory | Entrepreneurial and Small Business Operations | Industrial Organization

Research Areas

Economic Theory

Publication

China Finance Review International

Volume

11

Issue

3

First Page

406

Last Page

433

ISSN

2044-1398

Identifier

10.1108/CFRI-05-2021-0088

Publisher

Emerald

Copyright Owner and License

Publisher

Additional URL

https://doi.org/10.1108/CFRI-05-2021-0088

Download

Share

COinS