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Contingent capital with repeated interconversion between debt‐ and equity‐like instruments

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  • Yanping Cai
  • Zhaojun Yang
  • Zhiming Zhao

Abstract

This paper introduces a new form of contingent capital, contingent convertible securities (CCSs), which might repeatedly convert between debt‐ and equity‐like instruments depending on financial conditions. We derive explicit prices of corporate securities, assuming the cash flow is modeled as a geometric Brownian motion. We present an explicit value of the increased tax shields due to CCSs. We provide an explicit optimal capital structure when CCSs are issued and interestingly, the ratio of the optimal straight bond coupon to CCS coupon is constant and independent of the firm's financial conditions. All the conclusions hold true also for contingent convertibles.

Suggested Citation

  • Yanping Cai & Zhaojun Yang & Zhiming Zhao, 2019. "Contingent capital with repeated interconversion between debt‐ and equity‐like instruments," European Financial Management, European Financial Management Association, vol. 25(2), pages 358-379, March.
    • Handle: RePEc:bla:eufman:v:25:y:2019:i:2:p:358-379
    DOI: 10.1111/eufm.12165
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    3. Xiaolin Wang & Zhaojun Yang & Pingping Zeng, 2023. "Pricing contingent convertibles with idiosyncratic risk," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(3), pages 660-693, September.
    4. Guha, Rajiv & Sbuelz, Alessandro & Tarelli, Andrea, 2020. "Structural recovery of face value at default," European Journal of Operational Research, Elsevier, vol. 283(3), pages 1148-1171.
    5. Chen, Biao & Yan, Haoyang & Zhu, Nanhui, 2023. "Investment and financing for SMEs with bank-tax-guarantee," Economics Letters, Elsevier, vol. 231(C).
    6. Zhaojun Yang, 2020. "Investment and asset securitization with an option‐for‐guarantee swap," European Financial Management, European Financial Management Association, vol. 26(4), pages 1006-1030, September.

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