Are contingent convertibles going-concern capital?
| Autor: | Franco Fiordelisi, Ornella Ricci, George Pennacchi |
|---|---|
| Přispěvatelé: | Fiordelisi, Franco, Pennacchi, George, Ricci, Ornella |
| Jazyk: | angličtina |
| Rok vydání: | 2020 |
| Předmět: |
040101 forestry
Subordinated debt Economics and Econometrics 050208 finance media_common.quotation_subject 05 social sciences Event study Equity (finance) Downside risk Going concern Bank regulation Contingent capitalBank riskBank regulation 04 agricultural and veterinary sciences Monetary economics Debt 0502 economics and business Economics 0401 agriculture forestry and fisheries Finance Stock (geology) media_common |
| ISSN: | 1042-9573 |
| Popis: | Contingent convertibles (CoCos) are intended to either convert to new equity or be written down prior to failure while a bank is a going-concern. Yet, in the first actual test case, CoCos never converted before its bank failed. We develop a model that predicts that CoCos lead to less (more) extreme stock returns and have yields greater than (similar to) standard subordinated debt yields if investors do (do not) expect them to convert or be written down prior to failure. These predictions are tested using data on CoCos issued by European banks during 2011 to 2017. We find evidence that equity conversion CoCos reduce stock return variance and several other measures of downside risk, consistent with the perception that they are going-concern capital. However, we also provide event study evidence that recent regulatory actions reduced the CoCo–subordinated debt yield spread, which indicates a diminished investor belief that CoCos are going-concern capital. |
| Databáze: | OpenAIRE |
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