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| The Optimal Financing Mode of ODI Firms in China: From the Perspectiveof Asymmetric Information |
| GUO Guixia, ZHAO Yue, WU Ho-Mou
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Institute of International Economy, University of International Business and Economics;
People's Bank of China and China Finance 40 Forum;
China Europe International Business School;
National School of Development, Peking University |
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Abstract Chinese ODI firms have a prominent tendency for debt financing, overreliance on which has accumulated a dangerously high level of credit risk. In this paper, based on a theoretical model of information economics, we investigate the micro-mechanism of firms’ overreliance on debt when firms have private information about their project riskiness, by analyzing the equilibrium debt level that maximizes firms’ expected profit and the socially equilibrium debt level that can maximize social welfare. It is found that the problem of debt overreliance is more severe if the financed projects are riskier, or if host country risk is higher, or if firms are imposed on a higher tax rate. Our findings are helpful to put forward useful suggestions from this respect for our financial supporting policy system to promote Chinese “Belt and Road” firms to better conduct international investments.
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Received: 20 March 2016
Published: 01 January 1900
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