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The Agency of CoCos: Why Contingent Convertible Bonds Aren't for Everyone

Author

Listed:
  • Roman Goncharenko

    (KU Leuven - Department of Accountancy, Finance and Insurance (AFI))

  • Steven Ongena

    (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))

  • Asad Rauf

    (KUniversity of Groningen)

Abstract

Most regulators grant contingent convertible bonds (CoCos) the status of equity. Theory, however, suggests that CoCos can induce debt overhang, thereby, increasing the cost of issuing equity. First, we theoretically investigate how the extent of this debt overhang varies with bank characteristics. Our model predicts that riskier banks face higher debt overhang from CoCos. Our empirical analysis confirms that riskier banks are less likely to issue CoCos than their safer counterparts. Since under Basel III banks are expected to raise equity prior to CoCo conversion, riskier banks that anticipate future equity issuance are less likely to issue CoCos before.

Suggested Citation

  • Roman Goncharenko & Steven Ongena & Asad Rauf, 2019. "The Agency of CoCos: Why Contingent Convertible Bonds Aren't for Everyone," Swiss Finance Institute Research Paper Series 19-43, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp1943
    as

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    References listed on IDEAS

    as
    1. Avdjiev, Stefan & Bogdanova, Bilyana & Bolton, Patrick & Jiang, Wei & Kartasheva, Anastasia, 2017. "CoCo Issuance and Bank Fragility," CEPR Discussion Papers 12418, C.E.P.R. Discussion Papers.
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    6. Stephanie Chan & Sweder van Wijnbergen, 2016. "Coco Design, Risk Shifting Incentives and Capital Regulation," Tinbergen Institute Discussion Papers 16-007/VI, Tinbergen Institute, revised 13 Nov 2017.
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    More about this item

    Keywords

    CoCos; Contingent Convertible Bonds; Bank Capital Structure; Debt Overhang; Basel III;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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