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Debt‐for‐Equity Swaps under a Rational Expectations Equilibrium
Author(s) -
ERRUNZA VIHANG R.,
MOREAU ARTHUR F.
Publication year - 1989
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1989.tb04384.x
Subject(s) - swap (finance) , equity (law) , information asymmetry , debt , economics , loan , monetary economics , rational expectations , financial economics , interest rate swap , private information retrieval , business , econometrics , finance , mathematics , statistics , political science , law
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.