The Effects of Financial Support Policies on Corporate Decisions by SMEs

Abstract

This study seeks to identify the optimal level of SME financing policies by simulating how corporate decision-making, including bankruptcy decisions and bank interest rate decisions in the lending market, can be affected by government finance policies (public credit guarantees and interest support) in the presence of information asymmetry (imperfect information) for SMEs, a balanced fiscal policy, and the current tax regime. The basic purpose of SME financing policies is to alleviate financial friction and information asymmetry in order to realize the optimal allocation of resources. However, the existence of information asymmetry leads to a fiscal policy under which consumers should pay taxes for SMEs. Therefore, the amount of macro-financial assistance is determined at an optimal combination of income taxes paid by small businesses and final consumers. Moreover, this paper proposes more concrete policy measures to improve the credit guarantee policy on the basis of the presented theoretical discussions, in particular by analyzing the performances of SMEs. Previous studies focused mainly on exposure (or a lack of it) to credit guarantee policies rather than on the impact of the degree of exposure to a credit guarantee policy on the performance of SMEs. Therefore, this study empirically examines the effect of the ratio of guaranteed debt to total debt as a continuous policy treatment on SME performance outcomes with the GPS (generalized propensity score) method. Briefly, this study finds the following. The equilibrium model based on bankruptcy and lending decisions by SMEs shows that the current scale of public credit guarantees is higher than the optimal level of policies because the social cost is beyond the optimal level. This suggests that the government should consider gradually reducing the amount of public credit guarantees to maximize social welfare. Second, the performance analysis shows that the marginal effect of credit guarantee policies on their ratio of credit-guaranteed debt to total debt is decreasing for the SMEs. This suggests that it is necessary to limit the ratio of credit guarantees to total debt. This paper is organized as follows. Section II describes the current status of SME financial support programs and compares with other country-specific financial support policies in OECD countries. Section III develops the equilibrium model and Section IV conducts a social welfare analysis in accordance with a counter-factual economic model. Section V analyzes the policy effects of the credit guarantee program with firm-level data. Finally, Section VI proposes directions for improvement of the financial support programs for SMEs