25 May 2022 - 25 May 2022
1:30PM - 3:00PM
This seminar will take place both remotely and in person in MHL 453.
Topic: Non-dilutive CoCo Bonds: A Necessary Evil?
Seminar organised by the Department of Economics and Finance.
We empirically document and theoretically investigate why non-dilutive CoCos are prevalent, even though advocates of CoCos suggest such securities should be dilutive to reduce bank risk-taking. In an agency model with two subsequent moral hazards, we show that while dilutive CoCos deter ex-ante risk-taking and prevent a bank from being undercapitalized, penalizing existing shareholders with dilution when the bank is already undercapitalized leads to risk shifting. CoCos’ designs and risk implications depend on banks’ equity capitalization, with nondilutive CoCos particularly attractive to capital-constrained banks, because such securities can maximize the banks’ financing capacity by tackling only the ex-post risk shifting.