Work

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

Year: 2020

Type: article

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.

Source: Journal of Financial Intermediation

DOI: 10.1016/j.jfi.2020.100882

Authors: Roman Goncharenko, Steven Ongena, Asad Rauf

Institutions: KU Leuven, University of Zurich, Swiss Finance Institute, University of Groningen

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $2,530

Funder: European Resuscitation Council