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Credit insurance and investment: A contingent claims analysis approach

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  • Lai, Van Son
  • Soumaré, Issouf
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    Abstract

    This paper develops a continuous-time contingent claims analysis model to study the impact of credit insurance on investment. We find that under shareholders' wealth maximization, the presence of credit insurance yields high investment relative to the level of investment without credit insurance. We also obtain a U shape relationship between the project debt maturity and its investment size, with more investment undertaken with short and long maturities and less investment with intermediate maturities.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Financial Analysis.

    Volume (Year): 19 (2010)
    Issue (Month): 2 (March)
    Pages: 98-107

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    Handle: RePEc:eee:finana:v:19:y:2010:i:2:p:98-107

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    Web page: http://www.elsevier.com/locate/inca/620166

    Related research

    Keywords: Credit insurance Financial guarantees Investment incentives;

    References

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    4. Emery, Gary W, 2001. "Cyclical Demand and the Choice of Debt Maturity," The Journal of Business, University of Chicago Press, vol. 74(4), pages 557-90, October.
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    14. Ju, Nengjiu & Parrino, Robert & Poteshman, Allen M. & Weisbach, Michael S., 2005. "Horses and Rabbits? Trade-Off Theory and Optimal Capital Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(02), pages 259-281, June.
    15. Flannery, Mark J, 1986. " Asymmetric Information and Risky Debt Maturity Choice," Journal of Finance, American Finance Association, vol. 41(1), pages 19-37, March.
    16. McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-49, June.
    17. Nengjiu Ju & Hui Ou-Yang, 2006. "Capital Structure, Debt Maturity, and Stochastic Interest Rates," The Journal of Business, University of Chicago Press, vol. 79(5), pages 2469-2502, September.
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    Cited by:
    1. Jacques, Sébastien & Lai, Van Son & Soumaré, Issouf, 2011. "Synthetizing a debt guarantee: Super-replication versus utility approach," International Review of Financial Analysis, Elsevier, vol. 20(1), pages 27-40, January.

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