Increasing profitability through contingent convertible capital: Empirical evidence from European banks

Matthias Petras

Global Finance Journal, 2022, vol. 52, issue C

Abstract: This study investigates the effects of using additional tier 1 (AT1) capital instruments on bank profitability. It is motivated by the fact that the use of contingent convertible bonds (CoCo bonds) instead of equity offers a tax shield and incentives for efficient risk taking. I empirically analyze a panel dataset of 231 banks from EEA countries as well as Switzerland from 2014 to 2018. My analysis shows that the potential tax shield partly determines the use of CoCo bonds, and that the use of CoCo bonds instead of equity as AT1 capital significantly increases bank profitability.

Keywords: CoCo bonds; Contingent capital; Bank profitability (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:52:y:2022:i:c:s1044028320302829

DOI: 10.1016/j.gfj.2020.100582

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