Fixed Prices and Regulatory Discretion as Triggers for Contingent Capital Conversion: An Experimental Examination

Douglas Davis and Edward Prescott

International Journal of Central Banking, 2017, vol. 13, issue 2, 33-71

Abstract: We report a laboratory experiment that evaluates two price-based mechanisms for triggering the conversion of contingent-capital bonds into equity: a regulator who decides based on observed prices and a mechanistic fixed-price trigger. We find that when conversion decreases incumbent equity value, the regulator mechanism generates fewer conversion errors, particularly in environments where incentives bias a regulator against conversion and where a regulator receives his own signal. In contrast, when conversion increases incumbent equity value, a fixed-price trigger generates fewer conversion errors in these environments as well as when the regulator has the option to delay conversion.

Date: 2017
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Related works:
Working Paper: Fixed Prices and Regulatory Discretion as Triggers for Contingent Capital Conversion: An Experimental Examination (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2017:q:2:a:2

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