NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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CoCo Issuance and Bank Fragility

Stefan Avdjiev, Bilyana Bogdanova, Patrick Bolton, Wei Jiang, Anastasia Kartasheva

NBER Working Paper No. 23999
Issued in November 2017
NBER Program(s):The Corporate Finance Program

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. In this paper, 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 statistically significant declines in issuers’ CDS spreads, indicating that they generate risk-reduction benefits and lower costs of debt. This is especially true for CoCos that: i) convert into equity, ii) have mechanical triggers, iii) are classified as Additional Tier 1 instruments; 3) CoCos with only discretionary triggers do not have a significant impact on CDS spreads; 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.

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Document Object Identifier (DOI): 10.3386/w23999

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