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
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
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