The factors of affecting financing and Countermeasures in SME-Based on asymmetric information and ma.doc

1、1The factors of affecting financing and Countermeasures in SME-Based on asymmetric information and maAbstract: SME plays an irreplaceable role in the national economy and plays a huge role in Chinas economic development. However, SME faces many difficulties because of its characteristics. Especially

2、 financial difficulty has become the biggest bottleneck. The article indicates from internal and external factors that information asymmetry and higher costs owing to its own governance structure are the main reason of financing difficulties of SME, and then put forward the corresponding solutions.

3、Key words: asymmetric information, small and medium enterprises, financing 1. Introduction SME plays an irreplaceable role in the national economy and plays a huge role in Chinas economic development. The amount of small and medium enterprise is estimated up to 10.231 million under the current crite

4、ria for the classification of SME, which is more than 99% of the total number of enterprises. 2Currently, the small and medium enterprise creates the ultimate value on the products and services of more than 60% of GDP. The tax amount has exceeded 50% of total state tax revenue. SME provides more tha

5、n 80% of urban jobs. It is the obvious contradictions that SME faces financing difficulties in the development of China currently. How to solve the financing difficulties and create more development opportunities for small and medium enterprise has related to the future development and the developme

6、nt potential of SME. If the financing problems are not solved, it will not only affect the development of SME, but also affect the healthy operation of the entire economic system. 2.The factors of affecting financing in SME Endogenous capital and bank credit are the main source of funding for SME. C

7、learly, the small and medium business can not meet growing demand for capital solely relying on the source of financing. Indirect financing has become the primary means of raising funds for SME. The mainly difficulties of SME financing is the indirect financing in the current, which is difficult for

8、 SME to obtain financing from banks or obtain the amount of funds to meet their needs. In essence, the reasons can be summarized as both internal factors and external factors. 32.1 external causes - information asymmetry Bank loans program obtain the expected return depends not only on interest rate

9、s, but more directly dependent on the risk of default. Because of asymmetric information, It is asymmetry that the “hard information“ of actual need of bank such as project return rate and the “soft information“ of the reality of SME, which lead to banks can not accurately determine the risk of busi

10、nesses loans, so the interest rate has to be a main tool as vendor selection. As a result of adverse selection, Low-risk borrowers may be squeezed out by high-risk borrowers in the market owing to raising interest rates. Because risk-averse borrowers will exit the market at higher interest rates. Hi

11、gh-risk borrowers are often left to bear high interest rates. Therefore, the interest rate increase may lead to risk structural changes in the credit market. Borrowers present high risk characteristics as a whole. The existence of moral hazard may attract borrowers to higher-risk investment projects

12、 under high interest rates. Higher interest rates increase borrowers incentives to engage in high risk investment. Lenders can not fully monitor the behavior of borrowers because of information asymmetry between the lenders and the borrowers coupled with the cost of monitoring itself. Thus, banks ha

13、ve to 4consider the incentive and restraint mechanisms for the borrowers behavior. Interest rates can change the behavior of borrowers both as a mechanism for identifying and as an incentive mechanism for influencing the banks expected return. As increase of the interest rate raises the borrowers in

14、centive to engage in high-risk investment, the banks earnings will reduce. Borrowers may take “deviant behavior” against the interests of loans as a result of higher interest rates. And the supervision of lenders is difficult. Therefore, Banks would rather identify business risks than raise interest

15、 rates. The identification of the risk depends on the collection and processing of information. That is, banks tend to compare the marginal benefits given the interest rate and the marginal costs of information collection and processing for identifying business risks. In our current market economy,

16、due to non-standardized information disclosure and disclosure conditions, the degree of information asymmetry between the banks and the SME is often higher than the bank and the large enterprise. So in the credit markets SME usually becomes the “defining“ object out of credit markets. 2.2 internal f

17、actors - high cost of the marginal information 5From the point of the internal factors, the difficulties of SME financing reflect the marginal information cost of SME is higher than large enterprise which is due to SMEs specific information structure. The hierarchical structure is typical feature of

18、 internal governance in large enterprises. It has two prominent characteristics: Firstly, it is the separation from the enterprise ownership and management, Professional decision-making power is conducted by management capability, which resulted in the division of various functions on the horizontal

19、 direction. Secondly, from top management to the primary sector is defined into several aspects based on the division of functions, which result in the enterprise-level organizations on the vertical direction. This internal hierarchical structure depends on the characteristic of large enterprises. A

20、long with the expansion of the enterprise scale, the increase of the workload and the enhancement of the work complexity, Owners personal management effectiveness is more and more restrained by their limited rationality and management ability. Complex management procedures can be reasonably resolved

21、 through the hierarchical system. The various specialized departments are responsible for specific job. The highest level of rights is responsible for 6the coordination of the whole work. Therefore, its essence is the redistribution of the internal management capability and the specialized division

22、of the human capital efficiency. However, it will also increase the level of the information processing that increase the level of enterprise internal government. In order to ensure the information to communicate timely and accurately between the different decision-making layer and the same decision

23、-making layer, the large enterprise requires transferring information 、making decision and execute command by standardized procedures. Therefore, the information disclosure structure of the large enterprise must be standardized and easy to transfer. Large companies usually have a sound financial acc

24、ounting system and standardize financial statement system in reality. In contrast, the small and medium-sized enterprises lie in the initial stage of the development, small scale, non-stable operating condition, so the management complexity has not exceeded the owners personal ability. In the intern

25、al management the top management layer often directly command the production activities of the operation staff or only a small amount of middle-level management personnel participate in the job. Therefore, the character of the small and medium-sized 7enterprises governance structure presents simple

26、and single. In this kind of governance structure, enterprise ownership and management become one power. As the level of the internal management is less and the complexity degree of the management reduces, the corresponding levels of transfer information are less. Due to the principle of the most eco

27、nomic using information, business owners tend to collect scattered information by their own and centralized to make decision so as to ensure that they use information flexibility and make quick response in the face of emergency process. However, the primary scattered information is not broken up or

28、just broken up finitely in the process of passing to the top management, so it does not have a standardized expression form. It is only a set of data which contain much side information. It has strong personalized characteristics. For the enterprises internal management, they can understand accurate

29、ly and quickly obtain the minimum “information collection“ that they need depending on the long-established experiences under the particular production relations. But for the external users of information, they face a group of heterogeneous and chaotic data. It is difficult for them to understand. 8

30、One of the main features in the modern market economy is that ability which the manufacturers occupy and use the resources is an increasing function of effective information release. Validity of the information and its disclosure path become a direct reflection of the manufacturers market competitiv

31、eness. They are the “passport“ by which manufacturers enter the modern economy operations. This information structure of the SME reduces internal information costs, but it increases the ambiguity of information disclosed and the cost that outside investors acquire and use information at the same tim

32、e. Basically the financing problems of the SME depend on what extent the external investors trust the enterprise internal information. Although the financial statements may contain fake information, the overall sense, due to the lack of standardized information disclosure for the SME, the marginal r

33、eputation cost of the SME is higher than the marginal reputation of large enterprises, which is the internal difficulty of the SME financing in essence. 3. The development strategies of the SME financing 3.1Build multi-level financial systems 3.1.1 Open up new avenues for SME financing To solve the

34、difficulties of small and medium-sized 9enterprise financing, we should build multi-level financial system in which medium and small banks develop together, the state-owned, foreign and private banks complement each other and listed, trust and security work together. For example, new mechanisms for

35、bond financing of SMEs should be publicly established by local governments or trade associations. A number of key small and medium-sized enterprises should be screened to issue joint corporate bonds in public who have sustainable profitability, good sense to prevent the risks and strong solvency in

36、order to reduce financing costs and meet the medium-term financing needs. The policy bank should be formed for small and medium-sized enterprises. 3.1.2 The private capital into the body from the pump cycle The property rights of the folk financial institutions are clear and agent chain is short, so

37、 the agency cost of the folk financial institutions is low and the mechanism is flexible. The folk financial institutions have a stronger ability to control risk. Folk financial institutions can often fully understand the business activities of the borrowers engaged in, wealth status, social relatio

38、ns and moral by making full use of social and geographical advantages. This information helps to measure operational risks, credit capacity, social cost and 10psychological cost of the breach. Therefore, the development of small and medium-sized enterprises need fully mobilize the enthusiasm of the

39、folk capital holders. Private capital appreciation ability should be increased. At the same time informal finance should be specified and developed in order that the folk capital gradually incorporated into the formal financial system. The folk finance will be translated into the small and medium-si

40、zed finance. Then the supervision on them will be strengthened so that we can make full use of the civilian capital to serve the economic construction in China. 3.1.3 Perfect the system of capital market The second board market should be opened up for small and medium-sized enterprises in the system

41、 of direct financing. The development prospect of many small and medium-sized enterprises is very good and all aspects of the operating condition are also good, but the assets of the small and medium-sized enterprises are too small to reach the conditions that main board market need. So they will not raise funds directly from the capital market. In this situation we should actively create conditions to open the second board market in order to specialized help the enterprises with high growth innovations, especially high-tech companies. 3.2 Perfect the credit