From Credit Spread of CoCo Bonds to Franchise Value

Jiacheng Chen and Walter Farkas
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Jiacheng Chen: University of Zurich - Department Finance; Climate Asset Management
Walter Farkas: University of Zurich - Department Finance; Swiss Finance Institute; ETH Zürich

No 24-107, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We establish a theoretical framework that connects the credit spread of Contingent Convertible (CoCo) bonds to the evaluation of the franchise value of their issuers. This approach improves our capacity to assess franchise value with higher frequency by incorporating both market reactions and expectations. Our analysis extends to comparing franchise value assessments derived from this approach with those obtained using previous methodologies, demonstrating consistent relationships with various metrics, such as Tobin's Q ratio. Furthermore, we explore several applications, including a methodological framework for optimizing capital levels in banking institutions. This framework addresses a value-maximization problem, integrating considerations of franchise value alongside the option to default.

Keywords: Franchise value; Risk propensity; Capital level; CoCo bond (search for similar items in EconPapers)
Pages: 30 pages
Date: 2024-12
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp24107

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