CoCo Issuance and Bank Fragility
Stefan Avdjiev (),
Wei Jiang and
No 23999, NBER Working Papers from National Bureau of Economic Research, Inc
The promise of contingent convertible capital securities (CoCos) as a “bail-in” solution has been the subject of considerable theoretical analysis and debate, but little is known about their effects in practice. In this paper, we undertake the first comprehensive empirical analysis of bank CoCo issues, a market segment that comprises over 730 instruments totaling $521 billion. Four main findings emerge: 1) The propensity to issue a CoCo is higher for larger and better-capitalized banks; 2) CoCo issues result in statistically significant declines in issuers’ CDS spreads, indicating that they generate risk-reduction benefits and lower costs of debt. This is especially true for CoCos that: i) convert into equity, ii) have mechanical triggers, iii) are classified as Additional Tier 1 instruments; 3) CoCos with only discretionary triggers do not have a significant impact on CDS spreads; 4) CoCo issues have no statistically significant impact on stock prices, except for principal write-down CoCos with a high trigger level, which have a positive effect.
JEL-codes: G01 G21 G28 G32 (search for similar items in EconPapers)
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Published as Stefan Avdjiev & Bilyana Bogdanova & Patrick Bolton & Wei Jiang & Anastasia Kartasheva, 2020. "CoCo Issuance and Bank Fragility," Journal of Financial Economics, .
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Journal Article: CoCo issuance and bank fragility (2020)
Working Paper: CoCo issuance and bank fragility (2017)
Working Paper: CoCo Issuance and Bank Fragility (2017)
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