Government Support for SMEs in Response to COVID-19: Theoretical Model Using Wang Transform

29 Pages Posted: 6 Aug 2020 Last revised: 10 Aug 2020

See all articles by Shaun S. Wang

Shaun S. Wang

Southern University of Science and Technology; Nanyang Technological University; Georgia State University; University of Waterloo

Jing Rong Goh

Risk Lighthouse International, Singapore; Singapore Management University

Didier Sornette

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute; Southern University of Science and Technology; Tokyo Institute of Technology

He Wang

Southern University of Science and Technology

Esther Ying Yang

Risk Lighthouse, USA

Date Written: June 12, 2020

Abstract

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. Our paper distinguishes a firm’s intrinsic value and book value, where a firm can lose its intrinsic value when it encounters cash flow crunch. Our model highlights the importance of providing bridge loans to SMEs during the COVID-19 disruption to prevent massive business closures. Wang Transform is applied to (i) 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, (ii) describing the frailty distribution for SMEs, and (iii) defining banks’ underwriting capability and overlap index in risk selection. 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.

Keywords: COVID-19, SME, Bank Loan, Government Subsidy, Wang Transform

Suggested Citation

Wang, Shaun Shuxun and Goh, Jing Rong and Sornette, Didier and Wang, He and Yang, Esther Ying, Government Support for SMEs in Response to COVID-19: Theoretical Model Using Wang Transform (June 12, 2020). Swiss Finance Institute Research Paper No. 20-59, Available at SSRN: https://ssrn.com/abstract=3608646 or http://dx.doi.org/10.2139/ssrn.3608646

Shaun Shuxun Wang (Contact Author)

Southern University of Science and Technology ( email )

1088 Xueyuan Avenue
Shenzhen, Guangdong 518055
China
+8615815555369 (Phone)

Nanyang Technological University ( email )

S3-B1B-76 Nanyang Avenue
Singapore
Singapore

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

University of Waterloo ( email )

Waterloo, Ontario N2L 3G1
Canada

Jing Rong Goh

Risk Lighthouse International, Singapore ( email )

Singapore Management University

90 Stamford Road
178903
Singapore

Didier Sornette

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

Scheuchzerstrasse 7
Zurich, ZURICH CH-8092
Switzerland
41446328917 (Phone)
41446321914 (Fax)

HOME PAGE: http://www.er.ethz.ch/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Southern University of Science and Technology

1088 Xueyuan Avenue
Shenzhen, Guangdong 518055
China

Tokyo Institute of Technology

2-12-1 O-okayama, Meguro-ku
Tokyo 152-8550, 52-8552
Japan

He Wang

Southern University of Science and Technology ( email )

1088 Xueyuan Avenue
Shenzhen, Guangdong 518055
China

Esther Ying Yang

Risk Lighthouse, USA ( email )

United States

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