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Overview of an alternative trigger for DCL

Author

Listed:
  • Segal, Maxime
  • Ólafsson, Sverrir

Abstract

In this research letter, we suggest a novel trigger for Dynamic Control of Leverage (DCL). These instruments are analogous to conventional Contingent Convertible (CoCo) bonds, employed to constrain a firm’s leverage within specified limits, thus minimizing the likelihood of default. Our proposed trigger enables continuous leverage monitoring, bringing in the desired flexibility allowing the conversion to be triggered ahead of the cash payment. This alternative design, building upon the DCL mechanism, has been shown to further reduce the probability of default while preserving the desirable mean-reverting behaviour of the leverage dynamic. We provide evidence of the model’s effectiveness and discuss the implications of its implementation.

Suggested Citation

  • Segal, Maxime & Ólafsson, Sverrir, 2023. "Overview of an alternative trigger for DCL," Finance Research Letters, Elsevier, vol. 58(PA).
    • Handle: RePEc:eee:finlet:v:58:y:2023:i:pa:s1544612323006530
    DOI: 10.1016/j.frl.2023.104281
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    More about this item

    Keywords

    CoCo bonds; Hybrid securities; Leverage; Probability of default; Capital structure of the firm;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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