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- Title
Capital Structure Swaps and Shareholder Wealth.
- Authors
O'Brien, Thomas J.; Schmid Klein, Linda; Hilliard, James I.
- Abstract
We show how capital structure swaps can increase the wealth of a firm's long-term shareholders when a firm's debt or equity is misvalued. We review the conventional rule that a firm should issue equity and use the proceeds to retire outstanding debt (an equity-for-debt swap) when equity is overvalued, or repurchase equity with proceeds of new debt (a debt-for-equity swap) when equity is undervalued. We also analyse the more complex case where a firm's debt and equity are both undervalued, showing the optimal swap may be to issue undervalued equity, contrary to the conventional rule.
- Subjects
SWAPS (Finance); CAPITAL structure; STOCKHOLDER wealth; DEBT; EQUITY (Law); CORPORATE finance; FINANCIAL management
- Publication
European Financial Management, 2007, Vol 13, Issue 5, p979
- ISSN
1354-7798
- Publication type
Article
- DOI
10.1111/j.1468-036X.2007.00391.x