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Entrepreneurial Finance with Equity-for-Guarantee Swap and Idiosyncratic Risk

Wang, Huamao, Yang, Zhaojun, Zhang, Hai (2015) Entrepreneurial Finance with Equity-for-Guarantee Swap and Idiosyncratic Risk. European Journal of Operational Research, 241 (3). pp. 863-871. ISSN 0377-2217. (doi:10.1016/j.ejor.2014.09.013) (KAR id:41207)


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-for-guarantee 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.

Item Type: Article
DOI/Identification number: 10.1016/j.ejor.2014.09.013
Uncontrolled keywords: Finance; Borrowing Constraints; Equity-for-Guarantee Swap; Capital Structure; Cash-out Option
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Q Science > Operations Research - Theory
Divisions: Divisions > Division of Computing, Engineering and Mathematical Sciences > School of Mathematics, Statistics and Actuarial Science
Divisions > Kent Business School - Division > Kent Business School (do not use)
Depositing User: Huamao Wang
Date Deposited: 29 May 2014 11:41 UTC
Last Modified: 08 Dec 2022 22:53 UTC
Resource URI: (The current URI for this page, for reference purposes)

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