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The Agency of CoCos: Why Contingent Convertible Bonds Aren't for Everyone

Roman Goncharenko, Steven Ongena and Asad Rauf
Additional contact information
Steven Ongena: University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)
Asad Rauf: KUniversity of Groningen

No 19-43, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Most regulators grant contingent convertible bonds (CoCos) the status of equity. Theory, however, suggests that CoCos can induce debt overhang, thereby, increasing the cost of issuing equity. First, we theoretically investigate how the extent of this debt overhang varies with bank characteristics. Our model predicts that riskier banks face higher debt overhang from CoCos. Our empirical analysis confirms that riskier banks are less likely to issue CoCos than their safer counterparts. Since under Basel III banks are expected to raise equity prior to CoCo conversion, riskier banks that anticipate future equity issuance are less likely to issue CoCos before.

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)
Pages: 67 pages
Date: 2019-06
New Economics Papers: this item is included in nep-ban, nep-cba and nep-fmk
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Working Paper: The Agency of CoCos: Why Contingent Convertible Bonds Aren't for Everyone (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1943

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