Research
Working Papers
A Pecking Order in Contingent Convertible Bond (CoCo) Financing, with Linda Allen and Joonsung Won.
Abstract: Originally designed as an equity-diluting disciplinary mechanism, contingent convertible bonds (CoCos) have evolved to permit less punitive nondilutive triggers. Using a novel measure of CoCo dilution and a comprehensive hand-collected dataset covering 27 countries, our empirical findings suggest a pecking order in CoCo issuance, where banks generally prefer less information sensitive, nondilutive (debt-like) structures, but shift to incentive-compatible (equity-like) dilutive CoCos to address risk shifting agency conflicts during periods of aggregate uncertainty. Negative abnormal returns are found for dilutive CoCo announcements, but not for nondilutive CoCos. This negative market reaction reverses during periods of heightened aggregate uncertainty, with dilutive CoCos generating positive announcement returns. The equity and CoCo bonds of banks issuing dilutive CoCos perform more favorably when aggregate uncertainty is elevated.
Presented at:
- Financial Managers Association (FMA) 2025 Annual Meeting (Vancouver, 2025).
- European Financial Management Association (EFMA) 2025 Annual Meeting (Athens, 2025).
- Midwest Finance Association (MFA) 2024 Annual Meeting. Chicago, USA (March 2024).
- Eastern Finance Association (EFA) 60th Annual Meeting. St. Petersburg, USA (April 2024).
- Financial Management Association (FMA) 2024 European Conference. Turin, Italy (June 2024).
Publications
Do CoCos Serve the Goals of Macroprudential Supervisors or Bank Managers?, with Linda Allen. Journal of International Financial Markets, Institutions & Money, Volume 84, April 2023, 101761.
Abstract: Using a hand-collected, comprehensive sample of contingent capital bonds (CoCos) issued by banks over the 2009-2019 period, we identify shifts in CoCo design features that nullify their putative salutary macroprudential benefits. Increasingly, CoCos are issued without punitive wealth transfers from shareholders to bondholders, thereby removing incentives for bank managers to take preemptive, risk-reducing action in order to prevent the CoCo from triggering. That is, CoCos are overwhelmingly issued with conversion ratios of zero (principal writedowns) that do not mitigate bank risk taking.
Further, CoCo issuance can be used to circumvent supervisory discretion over bonus and dividend payouts. That is, CoCos issued as Additional Tier 1 capital relax regulatory constraints, particularly for banks close to the Maximum Distributable Amount (MDA) threshold. Bank managers are aware of these loopholes and exploit them to the detriment of financial market stability and macroprudential objectives.
Presented at:
- 5th Edition of International Risk Management Conference (IRMC) on ”Risk Management and Sustainability in an Era of Pandemic and Climate Change”. Bari, Italy (July 2022).
- 28th Dubrovnik Economic Conference. Dubrovnik, Croatia (July 2022).
- Bank of Israel. Jerusalem, Israel (July 2022).
- Special Theme Conference of the Journal of International Financial Markets, Institutions & Money (JIFMIM) and Finance Research Letters (FRL) on ”The Effectiveness of Financial Regulation”. Rishon LeTsyon, Israel (June 2022).
Work in Progress
- International Regulatory Frameworks and the Role of CoCo Capital Instruments.
- Industry Concentration and Momentum Crashes.
Awards
- Mills & Tannenbaum Award for Outstanding Scholarship, Baruch College