On Equilibrium When Contingent Capital Has a Market Trigger: A Correction to Sundaresan and Wang Journal of Finance (2015)

30 Pages Posted: 16 Jul 2018

See all articles by George Pennacchi

George Pennacchi

University of Illinois

Alexei Tchistyi

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: June 26, 2018

Abstract

This paper identifies an error in Sundaresan and Wang (2015), hereafter SW, that invalidates its Theorem 1. The paper develops a model of contingent capital (CC) with a stock price trigger that is consistent with SW's framework and yields closed-form solutions for stock and CC prices. Yet the model shows that unique stock price equilibria exist for a broader range of CC contractual terms than those required by SW. Specifically, when conversion terms benefit CC investors and penalize shareholders, a unique equilibrium can exist rather than the multiple equilibria stated in SW.

Keywords: contingent convertibles

JEL Classification: G21, G13

Suggested Citation

Pennacchi, George G. and Tchistyi, Alexei, On Equilibrium When Contingent Capital Has a Market Trigger: A Correction to Sundaresan and Wang Journal of Finance (2015) (June 26, 2018). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3203142

George G. Pennacchi (Contact Author)

University of Illinois ( email )

4041 BIF, Box 25
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Champaign, IL 61820
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217-244-0952 (Phone)

HOME PAGE: http://www.business.illinois.edu/gpennacc/

Alexei Tchistyi

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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