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

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  • Bowe, Michael
  • Dean, James W

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.

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  • Bowe, Michael & Dean, James W, 1993. "Debt-Equity Swaps: Investment Incentive Effects and Secondary Market Prices," Oxford Economic Papers, Oxford University Press, vol. 45(1), pages 130-147, January.
    • Handle: RePEc:oup:oxecpp:v:45:y:1993:i:1:p:130-47
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    Cited by:

    1. Bowe, M. & Dean, J.W., 1997. "Has the Market Solved the Sovereign-Debt Crisis?," Princeton Studies in International Economics 83, International Economics Section, Departement of Economics Princeton University,.
    2. Michael Bowe & James W. Dean, 1997. "Debt-equity swaps and the enforcement of sovereign loan contracts," Journal of International Development, John Wiley & Sons, Ltd., vol. 9(1), pages 59-83.

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