Optimal conversion ratio of contingent capital under issuance constraints

Sijia Zhang, Xin Xia and Liu Gan

International Review of Financial Analysis, 2025, vol. 100, issue C

Abstract: We develop a model of banking to clarify how contingent convertible bonds (CoCos) affect banks’ financing and investment policies when they face the upper limit of CoCo issuance. We then discuss the optimal conversion ratio of CoCos. In contrast to the frictionless setting, banks with more dilutive terms optimally choose to delay investment and issue first larger and then smaller CoCos. For banks with a weak (strong) issuance constraint, given high (low) asset volatility or low (high) deposit account service income, mandatory conversion to equity CoCos (permanent full write–down CoCos) are preferred. These findings may provide an explanation for why these two types of CoCos prevail in the market.

Keywords: CoCos; Issuance constraints; Investment; Financing (search for similar items in EconPapers)
JEL-codes: G31 G33 G34 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:100:y:2025:i:c:s105752192500050x

DOI: 10.1016/j.irfa.2025.103963

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