Contingent Capital with a Stock Price Trigger
26 Pages Posted: 15 Feb 2016 Last revised: 10 Mar 2016
Date Written: March 7, 2016
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: Suggested Citation