Debt-Equity Swaps: Investment Incentive Effects and Secondary Market Prices

Michael Bowe and James W Dean

Oxford Economic Papers, 1993, vol. 45, issue 1, 130-47

Abstract: This paper analyzes the investment incentives associated with a debt-equity swap program. Swaps increase debtor nations' incentives to commit capital to investments with a positive net present value. A necessary condition for mutually beneficial swaps is derived which, unlike alternative models, is independent of the risk attitudes of swap market participants. Two results follow. First, debtors will swap a maximum proportion of equity in an investment project with foreign creditors. Second, creditors require a minimum price of equity in terms of debt to participate in the swap. The swap's effects on the secondary market price of debt are examined. Copyright 1993 by Royal Economic Society.

Date: 1993
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