Does bank-tax-interaction benefit small and medium manufacturer? An intertemporal signaling game

Abstract

High cost of financing is a major obstacle to the growth of small and medium enterprises (SMEs), with opaque operational information being an important factor. Recently, a novel type of bank loan, bank-tax-interaction (BTI), which requires SMEs to share their previous tax information with the bank (e.g., via the tax administration), aims to lower SMEs’ financing costs by improving the information transparency. We develop a two-period intertemporal signaling game in which market demands are uncertain and correlated over the two periods. The manufacturer (SME) that is better informed about the market relies on bank loan for production, and the bank offers two types of bank loans: BTI and the traditional bank credit loan (BCL). Interestingly, we find that BTI does benefit the manufacturer when the market in the last period is low and the demand uncertainty is small. Notably, BTI does not lower the manufacturer’s financing cost, but reduces the operational inefficiency caused by the manufacturer distorting the amount of the bank loan to convey market information to the bank under BCL. Moreover, the impact of the correlation between the markets in the two periods may be non-monotonic on the manufacturer’s total profit, but monotonic on the bank’s total profit. Our findings shed light on the underlying mechanism by which BTI benefits small and medium manufacturers and provide insights into the operations of small and medium manufacturers and banks.