Optimal capital structure with an equity-for-guarantee swap

Yang, Zhaojun; Hai, Zhang

doi:10.1016/j.econlet.2012.11.023

Cited by 50 publications

(40 citation statements)

References 6 publications

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“…In order to overcome such financing constraints, a financial product, called equity-forguarantee swap (EGS), which was invented in China since 2002, is becoming more and more popular. However, to the best of our knowledge, there is no quantitative study on such swaps apart from Yang and Zhang (2013), who consider only the equilibrium pricing problem for a firm with the swap.…”

Section: Resultsmentioning

confidence: 99%

“…The guarantee cost here is fundamentally different from that given by Yang and Zhang (2013), which does not take into account that the entrepreneur is a risk-averse individual and has the option to cash out. For this reason, thanks to game theory, the equilibrium value of equity must be related to the entrepreneur's decisions on the cash-out option and a default threshold, which is clearly different from that in Yang and Zhang (2013) based on a risk-neutral world.…”

Section: Guarantee Costs and Equity-for-guarantee Swapsmentioning

confidence: 95%

“…However, Yang and Zhang (2013) merely discuss traditional capital structure issues in the classic framework of Leland (1994). Our model examines this contract in a more general context with idiosyncratic risk and cash-out option.…”

mentioning

confidence: 99%

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

Wang

Yang

Hai

2015

European Journal of Operational Research

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We consider a risk-averse entrepreneur who invests in a project with idiosyncratic risk. In contrast to the literature, we assume the entrepreneur is unable to get a loan from a bank directly because of the low creditability of the entrepreneur and so an innovative financial contract, named equity-forguarantee swap, is signed among a bank, an insurer, and the entrepreneur.It is shown that the new swap leads to higher leverage, which brings more diversification and tax benefits. The new swap not only solves the problems of financing constraints, but also significantly improves the welfare level of the entrepreneur. The growth of welfare level increases dramatically with risk aversion index and the volatility of idiosyncratic risk.

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Section: Resultsmentioning

confidence: 99%

Section: Guarantee Costs and Equity-for-guarantee Swapsmentioning

confidence: 95%

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

Wang

Yang

Hai

2015

European Journal of Operational Research

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“…See Appendix B. □ Now, we digress to review the main conclusions about EGS discussed by Yang and Zhang (2013).…”

Section: Equilibrium Pricing Under Ogsmentioning

confidence: 98%

“…Using an equilibrium pricing method, Yang and Zhang (2013) provide the guarantee cost and optimal capital structure and quantitatively analyze the welfare improvement for an entrepreneur who enters into EGS.…”

Section: Introductionmentioning

confidence: 99%

Two new equity default swaps with idiosyncratic risk

Yang

Zhang

2015

International Review of Economics & Finance

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An Algorithm for the Pricing and Timing of the Option to make a Two-Stage Investment with Credit Guarantees

Dong

Yang

2021

Comput Econ

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We develop a jump-diffusion model for a guarantee-investment combination financing mode (G-I mode) that is recently popular in financial practice. We assume that a borrower has exclusively an option to invest in a project in two stages. The project’s cash flow follows a double exponential jump-diffusion process and it is increased by a growth factor once the second-stage investment is exercised. The first-stage investment cost is financed by a bank loan with the guarantee provided by an insurer, who promises to provide the second-stage investment cost as well as take the lender’s all default losses. In return for the guarantee and investment, the borrower pays a guarantee fee upon first investment and grants a fraction of equity upon second investment to the insurer. In sharp contrast to prior papers on guarantee, the guarantee costs are contracted prior to investment. We provide closed-form solutions and produce a numerical algorithm for the timing and pricing of the two investment options.

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Optimal capital structure with an equity-for-guarantee swap

Cited by 50 publications

References 6 publications

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

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

Two new equity default swaps with idiosyncratic risk

An Algorithm for the Pricing and Timing of the Option to make a Two-Stage Investment with Credit Guarantees

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