Overview of an alternative trigger for DCL

Maxime Segal and Sverrir Ólafsson

Finance Research Letters, 2023, vol. 58, issue PA

Abstract: In this research letter, we suggest a novel trigger for Dynamic Control of Leverage (DCL). These instruments are analogous to conventional Contingent Convertible (CoCo) bonds, employed to constrain a firm’s leverage within specified limits, thus minimizing the likelihood of default. Our proposed trigger enables continuous leverage monitoring, bringing in the desired flexibility allowing the conversion to be triggered ahead of the cash payment. This alternative design, building upon the DCL mechanism, has been shown to further reduce the probability of default while preserving the desirable mean-reverting behaviour of the leverage dynamic. We provide evidence of the model’s effectiveness and discuss the implications of its implementation.

Keywords: CoCo bonds; Hybrid securities; Leverage; Probability of default; Capital structure of the firm (search for similar items in EconPapers)
JEL-codes: G12 G21 G28 G32 G33 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:58:y:2023:i:pa:s1544612323006530

DOI: 10.1016/j.frl.2023.104281

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