The agency of CoCos: Why contingent convertible bonds are not for everyone

Roman Goncharenko, Steven Ongena and Asad Rauf

Journal of Financial Intermediation, 2021, vol. 48, issue C

Abstract: Some regulators grant contingent convertible bonds (CoCos) the status of “going-concern” capital. Theory, however, suggests that CoCos can induce debt overhang, thereby amplifying the leverage ratchet effect. In this paper, we provide empirical evidence consistent with this theory. Our results suggest that banks with more volatile assets (riskier banks) (i) are less likely to issue CoCos, (ii) conditional on having CoCos outstanding are less likely to issue equity, and (iii) prefer issuing equity over CoCos. Since riskier banks suffer from more debt overhang it is more costly for them to issue CoCos.

Keywords: CoCos; Contingent convertible bonds; Bank capital structure; Debt overhang; Basel III (search for similar items in EconPapers)
JEL-codes: G01 G12 G24 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: The Agency of CoCos: Why Contingent Convertible Bonds Aren't for Everyone (2019)
Working Paper: The Agency of CoCos: Why Contingent Convertible Bonds Aren't for Everyone (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:48:y:2021:i:c:s104295732030036x

DOI: 10.1016/j.jfi.2020.100882

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