Faculty of Management, McGill University. The authors wish to thank Jin-Chaun Duan, Ken Froot, and Don Lessard for many helpful comments.
Debt-for-Equity Swaps under a Rational Expectations Equilibrium
Article first published online: 30 APR 2012
1989 The American Finance Association
The Journal of Finance
Volume 44, Issue 3, pages 663–680, July 1989
How to Cite
ERRUNZA, V. R. and MOREAU, A. F. (1989), Debt-for-Equity Swaps under a Rational Expectations Equilibrium. The Journal of Finance, 44: 663–680. doi: 10.1111/j.1540-6261.1989.tb04384.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
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.