On the cash-flow and control rights of contingent capital

Chris Mitchell

Journal of Banking & Finance, 2024, vol. 166, issue C

Abstract: Partial conversion of contingent capital (CC) provides its owners with a portfolio of equity and debt. Since the cash-flow rights on equity (debt) typically induce a preference for risk taking (safety), the net preference of CC-holders upon conversion will depend on their relative holdings of each asset, which in turn, depends on the amount of CC converted. Conversions also provide CC-holders with equity-control rights, which afford them greater influence over management. Taking into account these cash-flow/control rights, initial shareholders may find it optimal to: (1) select high-risk assets that create influential and risk-loving CC-holders, or (2) select low-risk assets that forestall the influence of safety-loving CC-holders.

Keywords: Contingent capital; Bank regulation; Capital Structure; Corporate governance (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 G34 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:166:y:2024:i:c:s0378426624001158

DOI: 10.1016/j.jbankfin.2024.107198

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