On the Preferences of CoCo Bond Buyers and Sellers

Abstract

This paper analyses the preferences of CoCo bond buyers and sellers assuming that they are mutually exclusive, and that buyers prefer CoCo bonds with higher safety-adjusted returns. We take into account both bond and issuing banks’ characteristics and investigate differences in the responses of investors in the low (25th), medium (50th) and high (75th) percentiles based on safety-adjusted returns. We find that CoCo bond buyers in those percentiles can be characterised as growth, value and active investors, respectively. In the case of sellers their needs to have bankruptcy protection and to comply with the Basel III financial regulations play a more important role than the buyers’ desire to increase their income from this fixed−income instrument. Sellers prefer to issue CoCo bonds when they are not financially sound whilst buyers have a preference for CoCo bonds with low risk; therefore, they can be characterised as being risk−loving and risk−averse respectively. Globally, the strongest preference responses of buyers and sellers are found in the UK and China, and those in the 75th percentile (with the highest safety-adjusted returns) react to the widest set of CoCo bond and issuing bank’s factors.

Keywords: CoCo bonds, buyers and sellers, preference scores, logistic regressions

JEL Classification: C250, C390, F390, G110, G210, G240, G280