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Contingent Convertible Bonds and Capital Structure Decisions

Author

Listed:
  • Dwight Jaffee

    (UC Berkeley)

  • Alexei Tchistyi

    (Haas School of Business, UC Berkeley)

  • Boris Albul

    (UC Berkeley)

Abstract

This paper provides a formal model of contingent convertible bonds (CCBs), a new instrument offering potential value as a component of corporate capital structures for all types of firms, as well as being considered for the reform of prudential bank regulation following the recent financial crisis. CCBs are debt instruments that automatically convert to equity if and when the issuing firm or bank reaches a specified level of financial distress. CCBs have the potential to avoid bank bailouts of the type that occurred during the subprime mortgage crisis when banks could not raise sufficient new capital and bank regulators feared the consequences if systemically important banks failed. While qualitative discussions of CCBs are available in the literature, this is the first paper to develop a formal model of their properties. The paper provides analytic propositions concerning CCB attributes and develops implications for structuring CCBs to maximize their general benefits for corporations and their specific benefits for prudential bank regulation.

Suggested Citation

  • Dwight Jaffee & Alexei Tchistyi & Boris Albul, 2013. "Contingent Convertible Bonds and Capital Structure Decisions," 2013 Meeting Papers 682, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:682
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    File URL: https://economicdynamics.org/meetpapers/2013/paper_682.pdf
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    References listed on IDEAS

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    1. Robert A. Eisenbeis & Larry D. Wall, 2002. "Reforming deposit insurance and FDICIA," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 1-16.
    2. Goldstein, Robert & Ju, Nengjiu & Leland, Hayne, 2001. "An EBIT-Based Model of Dynamic Capital Structure," The Journal of Business, University of Chicago Press, vol. 74(4), pages 483-512, October.
    3. Alon Raviv, 2004. "Bank Stability and Market Discipline: Debt-for-Equity Swap versus Subordinated Notes," Finance 0408003, EconWPA.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    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.
    2. Bleich, Dirk, 2014. "Contingent convertible bonds and the stability of bank funding: The case of partial writedown," Discussion Papers 28/2014, Deutsche Bundesbank.
    3. repec:eee:jmacro:v:54:y:2017:i:pb:p:285-305 is not listed on IDEAS
    4. Kenjiro Hori & Jorge Martin CerĂ³n, 2017. "Contingent Convertible Bonds: Payoff Structures and Incentive Effects," Birkbeck Working Papers in Economics and Finance 1711, Birkbeck, Department of Economics, Mathematics & Statistics.
    5. Goncharenko, Roman & Ongena, Steven & Rauf, Asad, 2017. "The agency of CoCo: Why do banks issue contingent convertible bonds?," CFS Working Paper Series 586, Center for Financial Studies (CFS).

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