Bank Interest Rate Setting And Corporate Financing Decisions Under Bankruptcy Risk

The World Bank reported in 2017 that the financing gaps of many countries exceed 20% of the national GDP,and most of them rely heavily on debt financing.Various risks in the operation of a debt-financed corporate can lead to bankruptcy risk.Firm bankruptcy is a complex event involving creditors,shareholders,courts and other subjects,among which bankruptcy through liquidation or reorganization is particularly critical.Liquidating viable firms not only bring unemployment,but may also bring great harm to their partners,industrial chains and even national economy.Reorganizing the firms that have lost their self-viability will lead to the ineffective occupation of social capital and seriously hinder the growth of new momentum such as new technologies and industries.In fact,China’s Supreme People’s Court has severely banned “zombie companies” from abusing reorganization programs to avoid being cleaned up.Both over liquidation and over reorganization are bankruptcy inefficiency,which are driven by the fact that creditors and debtors usually prefer different bankruptcy modes.There are big differences between bankruptcy liquidation and bankruptcy reorganization in the aspects of asset disposal,profit split,stakeholder participation,and business status.Therefore,under debt financing,from ex ante and ex post perspectives,this dissertation puts the bankruptcy risks and characteristics of different bankruptcy modes into the financial decision-making,operation decision-making,and bankruptcy selection.This is significant to banks’ credit rationing and interest rate pricing issues,and is valuable to the financing and operating decisions of debt-financed firms,and to the determination of bankruptcy mode of financially distressed firms.The main work and findings of this dissertation are as follows:Considering the risks of the firm’s bankruptcy liquidation and information opaque,this paper studies the interest rate pricing mechanism of the bank,the joint decision-making of financing and operation of the firm,and the transparency strategy of different information of the firm.The impacts of information transparency on corporate financing and operation are reflected into the bank’s financing premium and stochastic market demand.A comprehensive model covering financing,information transparency and production and operation is established,and the optimal decisions and their characteristics of both bank and firm are presented.Through research,it is found that there is a phenomenon in theory,the higer the transparency of certain information,the lower the borrowing upper limit and the higher the interest rate.This abnormal conclusion exists because the bank not only imposes a premium on corporate information opacity when setting interest rates,but also concerns about the damage of information transparency to corporate operations.When certain information is over-disclosed,operating damage may exceed the benefits of lower premiums,and the overall risk of the company will rise.Therefore,banks will set lower borrowing upperlimit and increase interest rate.In addition,the strategies of information transparency and inventory(borrowing)of cash-poor firms can be divided into five types: hiding information and not borrowing,hiding information and borrowing,completely transparent and not borrowing,completely transparent and borrowing,partially transparent and borrowing.Moreover,there are definite theoretical boundaries among different strategies.Next,considering the firm’s future bankruptcy risk is not just bankruptcy liquidation risk.Therefore,this paper refines and expands the bankruptcy risk to two different bankruptcy modes(liquidation and reorganization),so as to establish a bank-enterprise financing decision-making model involving both bankruptcy liquidation and bankruptcy reorganization,which is more practical and can improve the flexibility and efficiency of debt financing.Under the premise of considering different bankruptcy modes and their different risks,this paper studies the bank’s credit rationing and interest rate setting in flexible debt financing,and the corresponding investment and financing decisions of the firm,and the existence and efficiency of Pareto improvement of flexible debt financing.The study found that the bank sets different rations and interest rates based on different bankruptcy modes.Moreover,when the firm’s borrowing amount does not exceed the two rations corresponding to the two bankruptcy modes,the bank is willing to provide flexible debt financing service;when the borrowing amount only exceeds a certain ration,the bank will provide inflexible debt financing that allows only one bankruptcy mode;when the borrowing amount is higher than the two rations,the bank will not provide any financing assistance to the firm.In addition,even if the bank is willing to provide flexible financing assistance to the firm,the investment strategy of the firm may also be to abandon the investment project.If the going concern value of the firm’s capital assets is higher than an endogenous critical value,it should choose the reorganization-based debt financing mode as its financing strategy;otherwise,the liquidation-based debt financing mode should be selected as its financing strategy.Finally,compared with traditional debt financing,the Pareto improvement of flexible debt financing has been strictly proved.Furthermore,we counterintuitively found that:the scarcer the company’s funds,the greater the Pareto improvement;the Pareto improvement when the going concern value is small or large is small,while the Pareto improvement when the going concern value is moderate is greater.In addition,the existence of the Absolutely Priority Rule(APR)violation in bankruptcy reorganization has a very weak negative impact on Pareto improvement,that is,the APR violation as a negative factor in bankruptcy reorganization doesn’t damage the feasibility of flexible debt financing and the effect of implementation.Finally,considering that due to information asymmetry or distrust and other reasons,the ex-ante debt financing contracts may not be suitable for some enterprises and banks.Therefore,from ex post perspective,this paper explores the bank-enterprise resolution issue between liquidation and reorganization when an enterprise is on the verge of bankruptcy.This issue has always been the research focus in the field of business bankruptcy.Under the premise that the debt-financed firm is on the verge of bankruptcy,from the perspective of both creditors and shareholders,this paper constructs a resolution model between liquidation and reorganization.This paper reveals that under what conditions the bankruptcy reorganization will be unanimously accepted by creditors and shareholders,and carries out an empirical verification based on a large bankruptcy sample.The study found that when the reorganization’s ability of protecting or enhancing firm assets exceeds an endogenous-theoretical threshold,banks will be willing to cooperate with the firm’s shareholders and leadership to implement bankruptcy reorganization.In addition,the financially distressed firms in asset-heavy industries or with higher industrial growth stability are more likely to implement bankruptcy reorganization;the more friendly the court is to a firm’s creditors,the more likely the firm is to implement bankruptcy reorganization;larger,transparenter and well-managed firms on the verge of bankruptcy are also more likely to implement bankruptcy reorganization.These findings are in line with the results of our empirical tests.The main innovation of this dissertation is as follows:(1)A joint decision model covering financing,information transparency and production and operation is constructed.The risk of bankruptcy and liquidation of the company,the premium behavior of the bank for opaque information,and the possible damage to the product market of the company’s information transparency are considered in the model;It provides a theoretical tool of interest rate pricing based on the borrowing amount and information transparency of firms for banks in competitive financial market.The optimal transparency strategy for different information of companies with low working capital is given,as well as the corresponding optimal borrowing amount and stocking amount.At the same time,it proves that the optimal strategy has diversity and reveals the theoretical boundary between different optimal strategies.(2)The corporate bankruptcy risk is refined and extended to two different bankruptcy modes(liquidation and reorganization),established a joint decision-making model of debt financing and operation involving both bankruptcy liquidation and bankruptcy reorganization,and proposed a flexible debt financing that can be liquidated and reorganized(bankruptcy mode is an option of debt covenant).It provides a new theoretical tool for both enterprises and banks to deal with corporate bankruptcy risks in advance,which is different from mortgage and guarantee.The different bankruptcy modes are incorporated into the credit rationing and interest rate pricing of the bank;it proves that flexible debt financing has a Pareto improvement effect,and reveals that the APR violation in reorganization almost has no negative impact.(3)In view of the fact that it may not be suitable for certain companies or banks to deal with corporate bankruptcy risks beforehand,there are many situations in reality that deal with bankruptcy risks afterwards,so we explores the issue that shareholders and creditors of the firms on the verge of bankruptcy choose bankruptcy reorganization or choose bankruptcy liquidation.Taking the mutual coordination between debt and equity as the starting point,a simple model of resolution between liquidation and reorganization is constructed.The boundary condition that bankruptcy reorganization will be unanimously agreed by creditors and shareholders is revealed for the first time.The implications of the model are empirically verified based on a large bankruptcy sample.In a word,under bankruptcy risk,this dissertation has always focused on the bank-enterprise decision-making issues in the process of debt financing,and carried out extensive and in-depth studies from ex-ante perspective to ex-post perspective,simple scenario to complex scenario.This dissertation has made positive contributions in refining the debt financing mode,enriching the theory of firm financing and operation,and alleviating the contradiction between creditors and shareholders when the firm goes bankrupt.This dissertation provides guidance for the loan business innovation of banks,provides decision-making reference for firms’ debt financing and operations,and provides some implications for commercial bankruptcy practices.