Entrepreneurial finance with equity-for-guarantee swap and idiosyncratic risk

Wang, Huamao; Yang, Zhaojun; Zhang, Hai

Abstract

© 2014 Elsevier B.V.All rights reserved. We consider a risk-averse entrepreneur who invests in a project with idiosyncratic risk. In contrast to the literature, we assume the entrepreneur is unable to get a loan from a bank directly because of the low creditability of the entrepreneur and so an innovative financial contract, named equity-for-guarantee swap, is signed among a bank, an insurer, and the entrepreneur. It is shown that the new swap leads to higher leverage, which brings more diversification and tax benefits. The new swap not only solves the problems of financing constraints, but also significantly improves the welfare level of the entrepreneur. The growth of welfare level increases dramatically with risk aversion index and the volatility of idiosyncratic risk.

Citation

Wang, H., Yang, Z., & Zhang, H. (2015). Entrepreneurial finance with equity-for-guarantee swap and idiosyncratic risk. European Journal of Operational Research, 241(3), 863-871. https://doi.org/10.1016/j.ejor.2014.09.013

• Journal Article Type: Article
• Acceptance Date: Sep 1, 2014
• Online Publication Date: Oct 22, 2014
• Publication Date: Mar 16, 2015
• Deposit Date: Apr 7, 2020
• Publicly Available Date: Apr 17, 2020
• Journal: European Journal of Operational Research
• Print ISSN: 0377-2217
• Electronic ISSN: 1872-6860
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 241
• Issue: 3
• Pages: 863-871
• DOI: https://doi.org/10.1016/j.ejor.2014.09.013
• Public URL: https://nottingham-repository.worktribe.com/output/4267100
• Publisher URL: https://www.sciencedirect.com/science/article/abs/pii/S0377221714007346?via%3Dihub
• Additional Information: This article is maintained by: Elsevier; Article Title: Entrepreneurial finance with equity-for-guarantee swap and idiosyncratic risk; Journal Title: European Journal of Operational Research; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.ejor.2014.09.013; Content Type: article; Copyright: Copyright © 2014 Elsevier B.V. All rights reserved.