Optimal Capital Structure with an Equity-for-Guarantee Swap

Yang, Zhaojun; Zhang, Hai

doi:10.2139/ssrn.2115188

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Optimal Capital Structure with an Equity-for-Guarantee Swap

Economics Letters, Volume 118, Issue 2, 2013, Pages 355-359, ISSN 0165-1765, Doi.org/10.1016/j.econlet.2012.11.023.

11 Pages Posted: 27 Jul 2012 Last revised: 2 May 2019

See all articles by Zhaojun Yang

Zhaojun Yang

Southern University of Science and Technology - Department of Finance

Hai Zhang

Strathclyde Business School

Date Written: September 2, 2012

Abstract

We study an equilibrium pricing of a new invented equity-for-guarantee swap and optimal capital structure of a firm, which enters into the swap. We present closed-form corporate security prices and guarantee cost, the percentage of the firm's equity allocated by the firm/borrower to an insurer in exchange for the guarantee. We find that the swap can significantly increase the value of the firm. If the firm earns more/less in a recession/boom market, a claim to the equity is an insurance-like instrument to the insurer and so, the guarantee cost will decrease. Especially, the bigger the business risk of the firm, the more the decreased guarantee cost and the higher the leverage ratio of the firm.

Keywords: Equity-for-guarantee swap, Capital structure, Guarantee cost

JEL Classification: G21, G28, G32, G33

Suggested Citation: Suggested Citation

Yang, Zhaojun and Zhang, Hai, Optimal Capital Structure with an Equity-for-Guarantee Swap (September 2, 2012). Economics Letters, Volume 118, Issue 2, 2013, Pages 355-359, ISSN 0165-1765, Doi.org/10.1016/j.econlet.2012.11.023., Available at SSRN: https://ssrn.com/abstract=2115188 or http://dx.doi.org/10.2139/ssrn.2115188