Abstract
In this paper, we integrate bank-tax interaction (BTI) into a dynamic model in which the small- and micro-sized enterprises (SMEs) face debt issuance constraints and the challenge of low-carbon transformation. We analyze the interplay between investments in carbon emission reduction and financing decisions. The model generates the following implications: Firstly, BTI effectively removes the debt issuance constraints for the SMEs. Additionally, an increased credit multiple not only accelerates investment in carbon emission reduction but also reduces the bank’s credit line, lowers the optimal coupon, and simultaneously increases the probability of bankruptcy, leading to higher credit spreads for the SMEs.
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