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Debt‐for‐Equity Swaps under a Rational Expectations Equilibrium

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  • VIHANG R. ERRUNZA
  • ARTHUR F. MOREAU

Abstract

This paper analyzes LDC debt‐for‐equity swaps under a rational expectations equilibrium. Under full information, the swap can never be strictly preferred by the LDC, the MNC, and the bank. Under the postulated informational asymmetry assumptions the same results obtain, leading to the “lemons” market in reverse. Under rational expectations, the swap can only occur if the loan is correctly valued relative to all private information in the economy. Given that some swaps do occur, future models must reflect the unique features of swaps.

Suggested Citation

  • Vihang R. Errunza & Arthur F. Moreau, 1989. "Debt‐for‐Equity Swaps under a Rational Expectations Equilibrium," Journal of Finance, American Finance Association, vol. 44(3), pages 663-680, July.
    • Handle: RePEc:bla:jfinan:v:44:y:1989:i:3:p:663-680
    DOI: 10.1111/j.1540-6261.1989.tb04384.x
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    Cited by:

    1. Claessens, Stijn, 1993. "Alternative Forms of External Finance: A Survey," The World Bank Research Observer, World Bank, vol. 8(1), pages 91-117, January.

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