Premium
Investment and asset securitization with an option‐for‐guarantee swap
Author(s) -
Yang Zhaojun
Publication year - 2020
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12250
Subject(s) - securitization , leverage (statistics) , bankruptcy , swap (finance) , business , finance , asset (computer security) , investment (military) , dividend , economics , monetary economics , computer security , machine learning , politics , computer science , political science , law
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.