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Contingent Convertible Bonds and Capital Structure Decisions

  • Dwight Jaffee

    (UC Berkeley)

  • Alexei Tchistyi

    (Haas School of Business, UC Berkeley)

  • Boris Albul

    (UC Berkeley)

Registered author(s):

    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.

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    File URL: https://www.economicdynamics.org/meetpapers/2013/paper_682.pdf
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    Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 682.

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    Date of creation: 2013
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    Handle: RePEc:red:sed013:682
    Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
    Fax: 1-314-444-8731
    Web page: http://www.EconomicDynamics.org/society.htm
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    1. Alon Raviv, 2004. "Bank Stability and Market Discipline: Debt-for-Equity Swap versus Subordinated Notes," Finance 0408003, EconWPA.
    2. Robert A. Eisenbeis & Larry D. Wall, 2002. "Reforming deposit insurance and FDICIA," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 1-16.
    3. Gustavo Manso & Bruno Strulovici & Alexei Tchistyi, 2010. "Performance-Sensitive Debt," Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1819-1854.
    4. 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.
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