The Agency of CoCos: Why Contingent Convertible Bonds Aren't for Everyone
Journal of Financial Intermediation, Forthcoming
54 Pages Posted: 11 Nov 2017 Last revised: 10 Aug 2020
Date Written: June 9, 2019
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: Suggested Citation