The Agency of CoCos: Why Contingent Convertible Bonds Aren't for Everyone

67 Pages Posted: 11 Nov 2017 Last revised: 19 Sep 2019

See all articles by Roman Goncharenko

Roman Goncharenko

KU Leuven - Department of Accountancy, Finance and Insurance (AFI)

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Asad Rauf

University of Groningen

Date Written: June 9, 2019

Abstract

Most regulators grant contingent convertible bonds (CoCos) the status of equity. Theory, however, suggests that CoCos can induce debt overhang, thereby, increasing the cost of issuing equity. First, we theoretically investigate how the extent of this debt overhang varies with bank characteristics. Our model predicts that riskier banks face higher debt overhang from CoCos. Our empirical analysis confirms that riskier banks are less likely to issue CoCos than their safer counterparts. Since under Basel III banks are expected to raise equity prior to CoCo conversion, riskier banks that anticipate future equity issuance are less likely to issue CoCos before.

Keywords: CoCos, Contingent Convertible Bonds, Bank Capital Structure, Debt Overhang, Basel III

JEL Classification: G01, G12, G24

Suggested Citation

Goncharenko, Roman and Ongena, Steven R. G. and Rauf, Asad, The Agency of CoCos: Why Contingent Convertible Bonds Aren't for Everyone (June 9, 2019). Swiss Finance Institute Research Paper No. 19-43. Available at SSRN: https://ssrn.com/abstract=3067909 or http://dx.doi.org/10.2139/ssrn.3067909

Roman Goncharenko

KU Leuven - Department of Accountancy, Finance and Insurance (AFI) ( email )

Naamsestraat 69
Box 3525
Leuven, 3000
Belgium

HOME PAGE: http://sites.google.com/view/roman-goncharenko

Steven R. G. Ongena (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Asad Rauf

University of Groningen ( email )

Nettelbosje 2
Duisenburg Building, 8th Floor
Groningen, Groningen 9747AE
Netherlands

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