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Optimal conversion ratio of contingent capital under issuance constraints

Author

Listed:
  • Zhang, Sijia
  • Xia, Xin
  • Gan, Liu

Abstract

We develop a model of banking to clarify how contingent convertible bonds (CoCos) affect banks’ financing and investment policies when they face the upper limit of CoCo issuance. We then discuss the optimal conversion ratio of CoCos. In contrast to the frictionless setting, banks with more dilutive terms optimally choose to delay investment and issue first larger and then smaller CoCos. For banks with a weak (strong) issuance constraint, given high (low) asset volatility or low (high) deposit account service income, mandatory conversion to equity CoCos (permanent full write–down CoCos) are preferred. These findings may provide an explanation for why these two types of CoCos prevail in the market.

Suggested Citation

  • Zhang, Sijia & Xia, Xin & Gan, Liu, 2025. "Optimal conversion ratio of contingent capital under issuance constraints," International Review of Financial Analysis, Elsevier, vol. 100(C).
    • Handle: RePEc:eee:finana:v:100:y:2025:i:c:s105752192500050x
    DOI: 10.1016/j.irfa.2025.103963
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    More about this item

    Keywords

    CoCos; Issuance constraints; Investment; Financing;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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