EconPapers    
Economics at your fingertips  
 

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

Roman Goncharenko, Steven Ongena () and Asad Rauf

No 13344, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Most regulators grant contingent convertible bonds (CoCos) the status of equity. The theory, however, suggests that these securities can distort incentives via inducing debt overhang and risk shifting. In this paper, we therefore theoretically model how the degree of this distortion varies with bank risk. Our model predicts that riskier banks face higher debt overhang from CoCos. Next, analyzing a comprehensive database of CoCo issuance in Europe, we empirically test the predictions of our model. We find that banks with lower risk are more likely to issue CoCos than their riskier counterparts. Since in the current regulatory framework of Basel III banks are expected to raise equity prior to CoCo conversion, future debt overhang makes CoCos an expensive source of capital. Thus, riskier banks will opt for equity issuance over CoCos.

Keywords: Bank Capital Structure; Basel III; CoCos; Contingent Convertible Bonds; Debt overhang (search for similar items in EconPapers)
JEL-codes: G01 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-cba
Date: 2018-11
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=13344 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: The Agency of CoCos: Why Contingent Convertible Bonds Aren't for Everyone (2019) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:13344

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... rs/dp.php?dpno=13344

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2020-01-07
Handle: RePEc:cpr:ceprdp:13344