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Investment and asset securitization with an option‐for‐guarantee swap

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  • Zhaojun Yang

Abstract

This article addresses the investment and financing decisions of entrepreneurs entering into option‐for‐guarantee swaps (OGSs). OGSs increase investment option value significantly. Entrepreneurs initially accelerate their investments and then postpone them as funding gaps grow. Guarantee costs increase with project risks when the funding gap is sufficiently small or large, but the opposite holds true otherwise. Investments are postponed when project risks, effective tax rates, or bankruptcy costs increase. Surprisingly, the higher the project risk, the more the entrepreneur will borrow, with a much higher leverage than predicted by classic models. Entrepreneurs can use OGSs to securitize their assets.

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  • Zhaojun Yang, 2020. "Investment and asset securitization with an option‐for‐guarantee swap," European Financial Management, European Financial Management Association, vol. 26(4), pages 1006-1030, September.
    • Handle: RePEc:bla:eufman:v:26:y:2020:i:4:p:1006-1030
    DOI: 10.1111/eufm.12250
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    Cited by:

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