TY - JOUR
T1 - Contingent capital
T2 - The case of COERCs
AU - Pennacchi, George
AU - Vermaelen, Theo
AU - Wolff, Christian C.P.
N1 - Publisher Copyright:
Copyright 2014, Michael G. Foster School of Business, University of Washington.
PY - 2014/2/26
Y1 - 2014/2/26
N2 - This paper introduces and analyzes a new form of contingent convertible: a call option enhanced reverse convertible (COERC). If an issuing bank's market value of capital breaches a trigger, COERCs convert to many new equity shares that would heavily dilute existing shareholders, except that shareholders have the option to purchase these shares at the bond's par value. COERCs have low risk: They are almost always fully repaid in cash. Yet, they reduce government bailouts by replenishing a bank's capital. COERCs' design also avoids problems with market-value triggers, such as manipulation or panic, while reducing moral hazard and debt overhang.
AB - This paper introduces and analyzes a new form of contingent convertible: a call option enhanced reverse convertible (COERC). If an issuing bank's market value of capital breaches a trigger, COERCs convert to many new equity shares that would heavily dilute existing shareholders, except that shareholders have the option to purchase these shares at the bond's par value. COERCs have low risk: They are almost always fully repaid in cash. Yet, they reduce government bailouts by replenishing a bank's capital. COERCs' design also avoids problems with market-value triggers, such as manipulation or panic, while reducing moral hazard and debt overhang.
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U2 - 10.1017/S0022109014000398
DO - 10.1017/S0022109014000398
M3 - Review article
AN - SCOPUS:84916208382
SN - 0022-1090
VL - 49
SP - 541
EP - 574
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
IS - 3
ER -