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Fixed Prices and Regulatory Discretion as Triggers for Contingent Capital Conversion: An Experimental Examination

Author

Listed:
  • Douglas Davis

    (Virginia Commonwealth University)

  • Edward Simpson Prescott

    (Federal Reserve Bank of Cleveland)

Abstract

We report a laboratory experiment that evaluates two price-based mechanisms for triggering the conversion of contingent-capital bonds into equity: a regulator who decides based on observed prices and a mechanistic fixed-price trigger. We find that when conversion decreases incumbent equity value, the regulator mechanism generates fewer conversion errors, particularly in environments where incentives bias a regulator against conversion and where a regulator receives his own signal. In contrast, when conversion increases incumbent equity value, a fixed-price trigger generates fewer conversion errors in these environments as well as when the regulator has the option to delay conversion.

Suggested Citation

  • Douglas Davis & Edward Simpson Prescott, 2017. "Fixed Prices and Regulatory Discretion as Triggers for Contingent Capital Conversion: An Experimental Examination," International Journal of Central Banking, International Journal of Central Banking, vol. 13(2), pages 33-71, June.
    • Handle: RePEc:ijc:ijcjou:y:2017:q:2:a:2
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    Cited by:

    1. Te Bao & Edward Halim & Charles N. Noussair & Yohanes E. Riyanto, 2021. "Correction: Managerial incentives and stock price dynamics: an experimental approach," Experimental Economics, Springer;Economic Science Association, vol. 24(2), pages 649-649, June.
    2. Davis, Douglas D. & Korenok, Oleg & Lightle, John P., 2022. "Liquidity regulation, banking history and financial fragility: An experimental examination," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1372-1383.
    3. Mikhail S. Makushkin, 2024. "Yield Factors of Additional Tier 1 Bonds," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 125375, Russia, issue 5, pages 43-59, October.
    4. Davis, Douglas D. & Korenok, Oleg & Lightle, John P. & Prescott, Edward S., 2020. "Liquidity requirements and the interbank loan market: An experimental investigation," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 113-126.
    5. Philippe Oster, 2020. "Contingent Convertible bond literature review: making everything and nothing possible?," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(4), pages 343-381, December.

    More about this item

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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