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

Research output: Contribution to journalArticle

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.

Original languageEnglish (US)
Pages (from-to)1559-1576
Number of pages18
JournalJournal of Finance
Volume74
Issue number3
DOIs
StatePublished - Jun 2019
Externally publishedYes

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Finance
Contingent capital
Trigger
Stock prices
Investors
Closed-form solution
Shareholders
Multiple equilibria

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

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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.",
author = "Pennacchi, {George G} and Tchistyi, {Alexei Vladimirovich}",
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AB - 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.

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