Author : Ei Yang
Publisher :
ISBN 13 :
Total Pages : 48 pages
Book Rating : 4.:/5 (13 download)
Book Synopsis Optimal Capital Structure, Subsidy and the Unexpected Debt-Equity Swap Policy by : Ei Yang
Download or read book Optimal Capital Structure, Subsidy and the Unexpected Debt-Equity Swap Policy written by Ei Yang and published by . This book was released on 2018 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: The government proposed an unexpected one-time debt-equity swap in China in response to the rapidly growing leverage ratio of non-financial firms after 2008. We study the effects of this policy on the firms' investment decisions and the optimal capital structure in a dynamic model. To characterize some subsidized firms in reality, we model the government subsidy as a proportional reduction in the coupon payment. The subsidy induces the firm to initially take on more debt and generates a severe debt-overhang problem. We show that the swap can reduce leverage, promote investment and lower the agency cost. In addition, the subsidized firms benefit more from the swap. We study another subsidy-removal policy: removal of the subsidy if the swap is taken. Unlike the previous subsidy-stay policy, subsidized firms now face a tradeoff between the swap and subsidy. By comparing government benefits, the subsidy-removal policy dominates the subsidy-stay policy for firms with weak fundamentals. The opposite is true for firms with better fundamentals. These firms will pass on the swap under the subsidy-removal arrangement while taking the swap under the subsidy-stay arrangement. Therefore, a well-designed government policy is a mixture of these two policies.