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Are contingent convertibles going-concern capital?

Fiordelisi, Franco and Pennacchi, George and Ricci, Ornella (2020) 'Are contingent convertibles going-concern capital?' Journal of Financial Intermediation, 43. p. 100822. ISSN 1042-9573

FF_GP_OR_CoCos_16Feb2019.pdf - Accepted Version
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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.

Item Type: Article
Uncontrolled Keywords: Contingent capital; Bank risk; Bank regulation
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 24 Oct 2019 14:55
Last Modified: 06 Jan 2022 14:01

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