Are contingent convertibles going-concern capital?

Fiordelisi, Franco, Pennacchi, George and Ricci, Ornella (2019) Are contingent convertibles going-concern capital? Journal of Financial Intermediation . ISSN 1042-9573 (Published online first) (doi:10.1016/j.jfi.2019.03.007)

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Abstract

Contingent convertibles (CoCos) are intended to either convert to new equity or be written down prior to failure while a bank is a going concern. Yet, in the first actual test case, CoCos never converted before its bank failed. We develop a model that predicts that CoCos lead to less (more) extreme stock returns and have yields greater than (similar to) standard subordinated debt yields if investors do (do not) expect them to convert or be written down prior to failure. These predictions are tested using data on CoCos issued by European banks during 2011 to 2017. We find evidence that equity conversion CoCos reduce stock return variance and several other measures of downside risk, consistent with the perception that they are going-concern capital. However, we also provide event study evidence that recent regulatory actions reduced the CoCo – subordinated debt yield spread, which indicates a diminished investor belief that CoCos are going-concern capital.

Item Type: Article
Research Areas: A. > Business School > Accounting and Finance
Item ID: 26510
Notes on copyright: © 2019 Elsevier Inc. This author's accepted manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
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Depositing User: Franco Fiordelisi
Date Deposited: 29 Apr 2019 08:55
Last Modified: 10 May 2019 20:07
URI: https://eprints.mdx.ac.uk/id/eprint/26510

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