Empirical Analysis of Investors' Perceptions of CoCos: Are They Going Concern Capital?

Jakob Bøgsted

Student thesis: Master thesis

Abstract

If contingent convertible bonds (CoCos) are going concern capital, they should reduce stock price volatility, if investors perceive the magnitude and probability of conversion to be sufficiently high (Fiordelisi, Pennacchi, and Ricci, 2020). This study tests this hypothesis through a panel data methodology applied to a data set of listed European banks from 2012 to 2019. The empirical analysis is varied along two dimensions: Model specification and type of CoCo issuance. It is concluded that stock price volatility is reduced when including various lags of a CoCo issuance indicator variable, control variables, and a bank-specific fixed effect. This result is interpreted to mean that CoCos are potentially considered going concern capital by investors, since the finding implies that the market believes that loss absorption by CoCos will potentially occur in distress. However, the finding is not robust to inclusion of a year fixed effect. Thus further research into the matter is recommended. Further, evidence is presented that investors perceive equity conversion CoCos as more likely to convert than principal write down CoCos, but higher trigger levels do not seem to manifest in a higher perceived likelihood of conversion.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2021
Number of pages85
SupervisorsDavid Lando