Contingent Capital: The Case for COERCs

54 Pages Posted: 4 May 2011 Last revised: 23 Dec 2011

See all articles by George Pennacchi

George Pennacchi

University of Illinois

Theo Vermaelen

INSEAD - Finance; European Corporate Governance Institute (ECGI)

Christian C. P. Wolff

University of Luxembourg; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: December 23, 2011


This paper introduces, analyzes, and values a new form of contingent convertible (CoCo), a Call Option Enhanced Reverse Convertible (COERC). Issued as a bond, it converts to new shareholders’ equity if a bank’s market value of capital falls below a pre-specified trigger. The COERC avoids the problems with market based triggers such as “death spirals” as a result of manipulation or panic. A bank that issues COERCs also has a smaller incentive to choose investments that are subject to large losses. Furthermore, COERCs reduce the problem of “debt overhang,” the disincentive to replenish shareholders’ equity following a decline. The low risk of COERCS should increase their appeal to risk-averse bondholders.

Suggested Citation

Pennacchi, George G. and Vermaelen, Theo and Wolff, Christian C. P., Contingent Capital: The Case for COERCs (December 23, 2011). INSEAD Working Paper No. 2011/133/FIN, Available at SSRN: or

George G. Pennacchi (Contact Author)

University of Illinois ( email )

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Theo Vermaelen

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Christian C. P. Wolff

University of Luxembourg ( email )

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Centre for Economic Policy Research (CEPR)

United Kingdom

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