CoCo Bonds Issuance and Bank Fragility

Item Type Journal paper
Abstract The promise of contingent convertible capital securities (CoCos) as a ”bail-in” solution has been the subject of considerable theoretical analysis and debate, but little is known about their effects in practice. We undertake the first comprehensive empirical analysis of bank CoCo issues, a market segment that comprises over 730 instruments totaling $521 billion. Four main findings emerge: (1) the propensity to issue a CoCo is higher for larger and better capitalized banks; (2) CoCo issues result in a statistically significant decline in issuers’ CDS spread, indicating that they generate risk-reduction benefits and lower costs of debt (this is especially true for CoCos that convert into equity, have mechanical triggers, and are classified as Additional Tier 1 instruments); (3) CoCos with only discretionary triggers do not have a significant impact on CDS spreads; and (4) CoCo issues have no statistically significant impact on stock prices, except for principal write-down CoCos with a high trigger level, which have a positive effect.
Authors Avdjiev, Stefan; Bogdanova, Bilyana; Bolton, Patrick; Jiang, Wei & Kartasheva, Anastasia
Journal or Publication Title Journal of Financial Economics
Language English
Subjects finance
HSG Classification contribution to scientific community
Refereed Yes
Date June 2020
Publisher Elsivier
Number of Pages 21
ISSN 0304-405X
Publisher DOI https://doi.org/10.1016/j.jfineco.2020.06.008
Depositing User Prof. Dr. Anastasia Kartasheva
Date Deposited 01 Jul 2020 13:14
Last Modified 20 Jul 2022 17:42
URI: https://www.alexandria.unisg.ch/publications/260555

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Avdjiev, Stefan; Bogdanova, Bilyana; Bolton, Patrick; Jiang, Wei & Kartasheva, Anastasia (2020) CoCo Bonds Issuance and Bank Fragility. Journal of Financial Economics, ISSN 0304-405X

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https://www.alexandria.unisg.ch/id/eprint/260555
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