Research On Bank-Tax Interaction And Investment And Financing Of Small And Micro Enterprise

Small-and micro-sized enterprises(SMEs,henceforth)are the backbone of the development of the national economy,however,their availability of finance is always very limited,which has been all the attention of the community.China Banking Regulatory Commission and State Administration of Taxation jointly developed a new financial instrument in 2015,called the bank-tax-interaction(BTI,henceforth)in English.The BTI is a three-party contract among a bank/lender,the tax department,and a SME/borrower.In contract,the tax department provides the SME’s historical records of tax payment to the bank and then the bank lends at a given interest rate to the SME mainly based on historical records of tax payment,specifically,the credit line is a certain multiple of the total tax payment for the SME.BTI can solve finance problems of SMEs,encourage SMEs to pay tax in good faith,and reduce the credit risk of the bank,which is beneficial for three party among a bank/lender,the tax department,and a SMEs/borrower.According to statistics from the State Administration of Taxation up to the end of September 2019,the national banking financial institutions have cumulatively issued 1.609 million loans to creditworthy SMEs,and the amount of interactive loans used by SMEs with BTI has reached 1.57 trillion yuan.In order to improve the BTI to better help the development of SMEs,the reasonable design of BTI is important.Therefore,this paper builds the investment and financing model for SMEs with BTI via utilizing asset pricing theory and real options approach.Furthermore,we incorporate the partial information,the Public-Private Partnership(PPP)and the government’s policies of stimulating investment into the model,there by use the filter theory and dynamic programming approach to develop the investment and financing theory of SMEs.We simulate the models numerically and present comparative static analysis,thereby provide the reasonable design of BTI.This research finds new problems and sets up new models from financial practices in our country.It belongs to a cutting-edge research academically and is obviously creative,which has an important academic value in developing investment and financing theory for SMEs.It also has a significant application value to provide the reference for investors and regulators to make decisions.The work of this article is summarized as follows:First,we assume that SMEs finance through the BTI,there is no information asymmetry between banks and enterprises,and the capital structure is endogenously optimal.We found that the BTI can eliminate the financing constraints of SMEs.The investment motivation of SMEs and the bank credit multiplier are in a U-shaped relationship,and for SMEs with low growth rates,loose credit policy has a greater boost to its investment.Banks prefer to lend to SMEs with higher growth rates and lower volatility.The inhibitory effect of BTI on SMEs’ tax evasion depends on the bank’s credit policy.Second,introducing the private lending,assuming that the capital structure of SMEs before investment is pure equity,and the coupon is determined exogenously.Numerical analysis shows that compared with the private lending,BTI can not only effectively alleviate the financing difficulties of SMEs,but also significantly increase a firm’s value.BTI financing is not suitable for large companies with low external financing costs.There is a theoretically optimal credit policy that enables banks,tax authorities,and SMEs to achieve a win-win situation.Suppose further that the firm is initially capitalized with debt and equity before investment,and there exist a minimum degree of tax payment.By numerical analysis,In contrast to the case with pure private lending,we discover that the BTI can increase firms’ value,the tax revenue and accelerate investment,SMEs with more profitable growth opportunities and higher cost of private lending will benefit more from BTI financing.Furthermore,an increasing in the credit multiplier reduces the incentive for corporate tax evasion when the minimum degree of tax payment is higher.SMEs have to choose a capital structure consisting of pure equity from the point of view of the firm’s shareholders.SMEs should have debt in their capital structure from the perspective of social welfare maximization.Third,in a growth-option framework,we assume that the investment cost is shared by the government’s direct investment through public-private partnerships(PPPs)and the BTI.By providing a comparison with the private lending,we demonstrate that the BTI delays(accelerates)investment when the volatility of cash flow is low(high),and therefore mitigates the under-investment in unstable markets.Furthermore,the BTI can increase the firm value and reduce the leverage ratio and bankruptcy probability.The loan structure is affected by the factors such as the volatility,the tax rate,the investment cost sharing and the credit multiple.To be specific,the credit line of the BTI contract increases with these parameters.Most importantly,the agency cost due to the government’s direct investment reaches at the minimum value zero if the cost sharing is designed optimally,which provides an insightful guide for the government when investing in a project through PPPs.Fourth,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 the BTI increases the firm value under given debt maturity.Especially,under different debt maturity,the short-term debt increases the firm value when the volatility is low.Our model also predicts that SMEs will delay the investment for BTI financing in order to get a cheaper credit line.In the BTI contract,the investment will accelerate when the liquidity risk is higher and the profitability uncertainty is small under given debt maturity,the short-term debt will delay the investment when the volatility is low.The BTI causes the SME to retain more cash reserves,this is mainly because the BTI delay the investment.Our model predicts the shorter the debt maturity,the lower the cash reserves,this is due to the shorter maturities bonds tend to be more liquid,the firm need less cash reserves to against the liquidity default,which is in line with He &Xiong(2012).Finally,we find that the SME prefers to select the BTI as the main financing policy when the liquidity risk is higher and the profitability uncertainty is small.Fifth,this paper examines the design of BTI and the investment and financing decisions for SMEs under investment subsidy and tax reduction policies,respectively.We discover that compared with tax reduction,the firm with investment subsidy accelerates the investment,has the lower risk of default,the higher firm value and tighter credit multiplier.SMEs prefer to bank loans via BTI.However,for investment subsidy,SMEs choose the mixed financing by BTI and private lending when the volatility is low.Third,from the firm’s fundamental point of view,it demonstrates that the bank adopts easy credit policies for SMEs with low volatility,and adopts tight credit policies for SMEs with high volatility.Last,in the view of SMEs and government,it shows that in contrast with tax reduction,investment subsidy is the preferred policy.This article first quantitatively studies the new financing instrument of the BTI,and innovatively establishes the investment and financing model of SMEs with BTI from the perspective of real options.The research conclusions of this article provide a variety of theoretical explanations for the reasons why the BTI is favored by government departments and SMEs,provide a quantitative realistic theoretical reference for the scientific and reasonable formulation of the BTI,provide theoretical guidance for improving the BTI to better help SMEs pay taxes with integrity and allow them to enjoy the dividends of honest taxation,and provide theoretical guidance for building a social value system for trustworthy incentives and punishment for dishonesty.