Contingent Capital with a Stock Price Trigger

26 Pages Posted: 15 Feb 2016 Last revised: 10 Mar 2016

See all articles by John C. Handley

John C. Handley

University of Melbourne - Department of Finance

Date Written: March 7, 2016

Abstract

It is generally believed there is an equilibrium problem associated with contingent capital (CC) with a stock price trigger. In this paper I show that the problem instead reflects an internal inconsistency in the specification of the boundary conditions for conversion. A unique equilibrium will exist for CC with a stock price trigger which penalizes stockholders on conversion. A stock price trigger is ill defined for CC which penalizes CC holders on conversion but a unique equilibrium will exist if the price of the CC rather than the price of the stock is used as the trigger for conversion.

Keywords: Contingent capital, prudential capital, too-big-to-fail, convertible securities

JEL Classification: G12, G21

Suggested Citation

Handley, John C., Contingent Capital with a Stock Price Trigger (March 7, 2016). Available at SSRN: https://ssrn.com/abstract=2732234 or http://dx.doi.org/10.2139/ssrn.2732234

John C. Handley (Contact Author)

University of Melbourne - Department of Finance ( email )

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Parkville, Victoria 3010 3010
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