Entrepreneurial finance with equity-for-guarantee swap and idiosyncratic risk

Wang, Huamao; Yang, Zhaojun; Hai, Zhang

doi:10.1016/j.ejor.2014.09.013

Cited by 45 publications

(7 citation statements)

References 14 publications

(34 reference statements)

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“…It is true that a revolving line of credit would do so also without incurring extra costs. However, if the firm is a small business, adjustment by a revolving line of credit is generally unfeasible, see Luo, Wang, and Yang () and Wang, Yang, and Zhang (). In addition, as reported by Leland (), in the absence of transactions costs, restructuring by continuous readjustments of debt coupons would seem to be desirable to maximize total firm value as cash flow changes.…”

Section: Literature Review and Intuitive Analysismentioning

confidence: 99%

Contingent capital with repeated interconversion between debt‐ and equity‐like instruments

Cai

Yang

Zhao

2018

Euro Fin Management

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This paper introduces a new form of contingent capital, contingent convertible securities (CCSs), which might repeatedly convert between debt‐ and equity‐like instruments depending on financial conditions. We derive explicit prices of corporate securities, assuming the cash flow is modeled as a geometric Brownian motion. We present an explicit value of the increased tax shields due to CCSs. We provide an explicit optimal capital structure when CCSs are issued and interestingly, the ratio of the optimal straight bond coupon to CCS coupon is constant and independent of the firm's financial conditions. All the conclusions hold true also for contingent convertibles.

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Section: Literature Review and Intuitive Analysismentioning

confidence: 99%

Contingent capital with repeated interconversion between debt‐ and equity‐like instruments

Cai

Yang

Zhao

2018

Euro Fin Management

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“…The operational design apparently influence the cost and effectiveness of differential CGSs (Honohan, 2010). To strength CGS, an innovative instrument called Equity for Guarantee Swap (EGS) has been proposed (Yang and Zhang, 2013;Wang et al, 2015;Liu et al, 2016;Luo et al, 2016;Tang and Yang, 2017). An EGS is a three-party CGS agreement among a bank, a insurer/guarantee company, and an SME, where the SMEr obtains a loan from the bank and, if the SME defaults on the loan, the insurer must pay all the outstanding interest and principal to the bank.…”

Section: Introductionmentioning

confidence: 99%

Innovative Credit Guarantee Schemes with equity-for-guarantee swaps

Song

Hai

Zhao

2021

International Review of Financial Analysis

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Small and medium-sized enterprises (SMEs) faces much severer financial constraint compared to large companies and it is more vulnerable to market imperfection. To alleviate SMEs' financial constraints, Public Credit Guarantee Schemes (CGSs) have been introduced and widely used around the world. We first provide a thorough analysis of the effectiveness of the traditional CGSs and then introduce an innovative financing contract, referred to as equity-for-guarantee swap (EGS), with the aim of reducing SMEs' financial constraint in a more effective way. We show that EGS effectively reduces information asymmetry between lenders and SMEs and alleviates SMEs' severe financial constraint. We further investigate the impact of maturity on asset prices under EGS contract and analyse the value-at-risk (VAR) and expected shortfall (ES) of the insurer's risk exposure when participating in the EGS contract. Consistent with pecking order theory, an extension of our model shows that an SME tends to use equity financing first when it faces much severer financial constraint, then the SME issues more debt when it is less financially constrained.

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“…The financing choice about the new swap called EGS have already been considered in a serial of papers. The initial discussion can be found in Yang and Zhang (2013, 2015) and Wang et al (2015). These papers focus on the financing and investing decisions in the Leland (1994) structure.…”

Section: Introductionmentioning

confidence: 99%

A Dynamic Growth Model with Equity for Guarantee Swap and Asymmetric Information*

2019

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We develop an endogenous dynamic growth model in which a financially constrained firm optimizes the entrance timing and financing structure in different information exposure scenes. An innovation financing tool called equity‐for‐guarantee swap is introduced to solve the dilemma of financing constraints. The productivity of the firm is a random variable following a two‐point distribution and its value can be observed in advance by the entrepreneur but not by the insurer. Our main goal is to fix the fair guarantee cost with asymmetry information and examine how the cost differs from the one under the same situation except with symmetric information. We solve a Nash equilibrium of the game between the entrepreneur and the insurer and specify the condition to determine whether a separating equilibrium or pooling one will be achieved. We find that at the separating equilibrium, the high‐profit firm will sacrifice a profit to send a signal for the purpose of separating itself from the low‐profit one by increasing the latter's mimicking cost. The pooling equilibrium occurs when the insurer can not distinguish the firm's type and therefore, the insurer demands the same guarantee cost for all firms.

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Entrepreneurial finance with equity-for-guarantee swap and idiosyncratic risk

Cited by 45 publications

References 14 publications

Contingent capital with repeated interconversion between debt‐ and equity‐like instruments

Contingent capital with repeated interconversion between debt‐ and equity‐like instruments

Innovative Credit Guarantee Schemes with equity-for-guarantee swaps

A Dynamic Growth Model with Equity for Guarantee Swap and Asymmetric Information*

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