Interest Rate Swaps: a Managerial Compensation Approach
نویسندگان
چکیده
The market for interest rate swaps has grown consistently since its inception. Swaps involve “swapping” fixed interest rate debt for variable rate debt. We explain this growth using a game theoretic model. We focus on managerial and owner compensation differences under swaps and open market restructuring. We conclude that swaps occur because the swap market incorporates information about the firm more quickly than the open debt market. Hence, managers of firms whose credit risk has improved may capture the lower default risk premium more quickly in the swap market than they can in the open market. The lower default risk premium benefits owners and managers of firms whose compensation depends on the value of the firm.
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