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Article
Publication date: 26 July 2021

Shaun Shuxun Wang, Jing Rong Goh, Didier Sornette, He Wang and Esther Ying Yang

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…

2046

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.

Details

China Finance Review International, vol. 11 no. 3
Type: Research Article
ISSN: 2044-1398

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Available. Content available
17345

Abstract

Details

China Finance Review International, vol. 14 no. 1
Type: Research Article
ISSN: 2044-1398

Available. Content available
Article
Publication date: 2 August 2021

Shaun Shuxun Wang and Ming-hua Hsieh

595

Abstract

Details

China Finance Review International, vol. 11 no. 3
Type: Research Article
ISSN: 2044-1398

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Article
Publication date: 7 September 2023

Shaun Shuxun Wang

This paper provides a structural model to value startup companies and determine the optimal level of research and development (R&D) spending by these companies.

2021

Abstract

Purpose

This paper provides a structural model to value startup companies and determine the optimal level of research and development (R&D) spending by these companies.

Design/methodology/approach

This paper describes a new variant of float-the-money options, which can act as a financial instrument for financing R&D expenses for a specific time horizon or development stage, allowing the investor to share in the startup's value appreciation over that duration. Another innovation of this paper is that it develops a structural model for evaluating optimal level of R&D spending over a given time horizon. The paper deploys the Gompertz-Cox model for the R&D project outcomes, which facilitates investigation of how increased level of R&D input can enhance the company's value growth.

Findings

The author first introduces a time-varying drift term into standard Black-Scholes model to account for the varying growth rates of the startup at different stages, and the author interprets venture capital's investment in the startup as a “float-the-money” option. The author then incorporates the probabilities of startup failures at multiple stages into their financial valuation. The author gets a closed-form pricing formula for the contingent option of value appreciation. Finally, the author utilizes Cox proportional hazards model to analyze the optimal level of R&D input that maximizes the return on investment.

Research limitations/implications

The integrated contingent claims model links the change in the financial valuation of startups with the incremental R&D spending. The Gompertz-Cox contingency model for R&D success rate is used to quantify the optimal level of R&D input. This model assumption may be simplistic, but nevertheless illustrative.

Practical implications

Once supplemented with actual transaction data, the model can serve as a reference benchmark valuation of new project deals and previously invested projects seeking exit.

Social implications

The integrated structural model can potentially have much wider applications beyond valuation of startup companies. For instance, in valuing a company's risk management, the level of R&D spending in the model can be replaced by the company's budget for risk management. As another promising application, in evaluating a country's economic growth rate in the face of rising climate risks, the level of R&D spending in this paper can be replaced by a country's investment in addressing climate risks.

Originality/value

This paper is the first to develop an integrated valuation model for startups by combining the real-world R&D project contingencies with risk-neutral valuation of the potential payoffs.

Details

China Finance Review International, vol. 14 no. 1
Type: Research Article
ISSN: 2044-1398

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