A Quantitative Research Of Debt To Equity Swap Under Partial Reversibility Of Investment Cost

The financial crisis in 2008 has brought a huge impact on the world economy.Many countries have carried out many explorations and practices to effectively prevent and resolve financial risks.In the current environment of economic downturn,the non-performing loan ratio of commercial banks and enterprise leverage ratio in China are relatively high.Debt to equity swap is a feasible way to solve this problem.However,will the implementation of debt to equity have an impact on the company,and what kind of impact will it have? At present,there are few researches on this issue,and even fewer quantitative researches.From the perspective of debt renegotiation,this paper quantitatively analyzes the impact of debt to equity swap on the company under the partially reversible investment cost.We construct a structural model with the real option theory,and give the fair price of the company's securities and analyzes the economic significance numerically.Through the analysis,we find that: first,when the investment cost is partially reversible,the debt to equity swap promotes the investment delay,reduces the leverage ratio,bankruptcy probability and optimizes the capital structure of the company,and increases the welfare of the whole company.Secondly,The impact of debt to equity swap on investment timing and capital structure of a company is related to volatility,interest rate,tax rate and investment cost.The differences between this paper and other literatures on corporate finance are as follows: first,most of the literatures on the study of corporate investment with real option method are based on the assumption that the investment cost is irreversible.In fact,in the real economic life,When the enterprise goes bankrupt and liquidates,its investment project assets can be resold or auctioned to realize and recover part of the cost.In this paper,the assumption of investment irreversibility is relaxed,and investment is considered to be partially reversible.Secondly,there are a lot of literatures in the academic circle that analyze the influence of debt to equity swap on corporate investment decisions from the perspective of contingent convertible bonds.An important difference between this paper and them is that we analyze it from the perspective of debt renegotiation.Third,for a long time,the classic method used in project investment decision-making is discounted cash flow method(DCF).This method has two important defects: first,it needs to know the exact cash flow and the corresponding discount rate of the project investment in each accounting period.However,in the real project investment,there is always a certain randomness.It is difficult for us to know the future cash flow exactly in advance.The geometric Brownian motion can well describe the randomness of income.Second,it is a static analysis method.The real option method adopted in this paper is a dynamic method,which considers the time and risk factors that affect the value of the project comprehensively,and through the dynamic optimization method,the global optimal investment decision can be obtained.The research of this paper has made incremental contribution to enrich the corporate finance theory,and also can provide a theoretical reference for the implementation of our debt to equity swap.