CoCo Bonds Issuance and Bank Funding Costs: An Empirical Analysis
We conduct a first comprehensive empirical study of the bank contingent convertible (CoCo) issues market. Two main findings emerge from our study. First, the impact of CoCo issuance on CDS spreads is negative and statistically significant, indicating that CoCo issuance reduces banksícredit risk. The reduction in CDS spreads is much larger for mandatory conversion (MC) CoCos than for principal write-down (PWD) issues. The impact on CDS spreads for the &34;global systemically important bank" (GSIB) issuers tends to be considerably stronger in the lead-up to issuance than on and after the issue date. In contrast to CDS spreads, there is no significant impact on equity prices of CoCo issuers. Second, analysis of bankís securities pricing post CoCo issuance reveals that investors in CoCos view instruments as risky and place a significant likelihood on the possibility of conversion. Thus while CoCos provide capital buffer to banks, the effect on reducing risk-taking incentives is rather weak.
Avdjiev, Stefan, Bilyana Bogdanova, Patrick Bolton, Wei Jiang, and Anastasia Kartasheva. "CoCo Bonds Issuance and Bank Funding Costs: An Empirical Analysis." Columbia Business School, 2016.
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