Abstract: In order to lower corporate leverage, decrease high cost of bond, reduce banks' non-performing loan ratio and dissolve the risk of financial institutions, the debt-to-equity problem has caused wide concern for the government, companies and banks. Basing on the idea of debt renegotiations, partial debt-to-equity swaps model is built. All contingent claim is first priced by using risk neutral pricing method, and then the effects of debt-to-equity on the firm's value, bankruptcy probability, bankruptcy loss costs and capital structure are mainly examined. More interesting, a sufficient condition is obtained that the creditors are willing to change the way of debt restructuring to select debt-to-equity ex post.
It is found that, under predetermined bankruptcy liquidation contract, the all debt-to-equity swaps can always improve the equity value. But the value of the creditor is not always established. However, only if renegotiation ability between the shareholders and creditors satisfy some certain conditions, the creditors has an incentive to choose debt-to-equity swaps ex post so that truly achieve Pareto improvement and improve the level of social welfare. By numerical simulations, it is found that debt-to-equity are able to reduce the risk of bankruptcy and bankruptcy loss costs, but the risk premium of bond is raised; Moreover, the partial debt-to-equity can improve the firm's value within a certain range of equityholders' renegotiation capacity, which optimal convertible coupon ratio increases with the assets' volatility rising. Finally, as shareholders' bargaining power risee, the optimal firm value, convertible coupon ratio and leverage decrease, and while the credit spread of bond increase. Theoretical reference and practical guidance for the government, enterprises and banks on how to implement debt-to-equity swaps are provided in our paper.

Key words: debt-to-equity swaps, debt reorganization, bankruptcy loss cost, ruin probability, capital structure