Shareholder value creation using asset yield swap contracts

Flesch, A. (2009) Shareholder value creation using asset yield swap contracts. Acta Oeconomica, 59 (3). pp. 261-288. ISSN 0001-6373

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Abstract

In this paper, I investigate the shareholder value creation potential of a particular combination of corporate risk and capital structure strategies for a non-financial company. I examine the size of shareholder added value when the company increases its financial leverage while keeping its credit rating constant by hedging its asset yield volatility. Ross (1996) shows that by reducing the asset yield volatility of the company, its debt capacity can permanently be increased, which can create 10–15% additional value for shareholders. With the help of my model, I develop an alternative approach to quantify this impact on shareholder value with better calibration characteristics. Uniquely in the technical financial literature, I derive the shareholder value creation potential from the mean-reversion parameters of the asset yield process. Also, I define the optimal structure of swap-basket needed for efficient hedging of industrial asset yield process, and analyse the sensitivity of shareholder added value to the term and transaction costs of applied swap contracts.

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