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On Equilibrium When Contingent Capital Has a Market Trigger: A Correction to Sundaresan and Wang Journal of Finance (2015)

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  • GEORGE PENNACCHI
  • ALEXEI TCHISTYI

Abstract

This paper identifies an error in Sundaresan and Wang (2015, hereafter SW) that invalidates its Theorem 1. The paper develops a model of contingent capital (CC) with a stock price trigger that is consistent with SW's framework and yields closed‐form solutions for stock and CC prices. Yet, the model shows that unique stock price equilibria exist for a broader range of CC contractual terms than those required by SW. Specifically, when conversion terms benefit CC investors and penalize shareholders, a unique equilibrium can exist rather than the multiple equilibria stated in SW.

Suggested Citation

  • George Pennacchi & Alexei Tchistyi, 2019. "On Equilibrium When Contingent Capital Has a Market Trigger: A Correction to Sundaresan and Wang Journal of Finance (2015)," Journal of Finance, American Finance Association, vol. 74(3), pages 1559-1576, June.
    • Handle: RePEc:bla:jfinan:v:74:y:2019:i:3:p:1559-1576
    DOI: 10.1111/jofi.12762
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    Cited by:

    1. Goncharenko, Roman & Ongena, Steven & Rauf, Asad, 2021. "The agency of CoCos: Why contingent convertible bonds are not for everyone," Journal of Financial Intermediation, Elsevier, vol. 48(C).
    2. Avdjiev, Stefan & Bogdanova, Bilyana & Bolton, Patrick & Jiang, Wei & Kartasheva, Anastasia, 2020. "CoCo issuance and bank fragility," Journal of Financial Economics, Elsevier, vol. 138(3), pages 593-613.
    3. White, Lucy & Walther, Ansgar, 2019. "Rules versus Discretion in Bank Resolution," CEPR Discussion Papers 14048, C.E.P.R. Discussion Papers.
    4. Gaëtan Le Quang, 2019. "Mind the Conversion Risk: a Theoretical Assessment of Contingent Convertible Bonds," EconomiX Working Papers 2019-5, University of Paris Nanterre, EconomiX.
    5. Javadi, Siamak & Li, Weiping & Nejadmalayeri, Ali, 2023. "Contingent capital conversion under dual asset and equity jump–diffusions," International Review of Financial Analysis, Elsevier, vol. 89(C).
    6. Anne G. Balter & Nikolaus Schweizer & Juan C. Vera, 2020. "Contingent Capital with Stock Price Triggers in Interbank Networks," Papers 2011.06474, arXiv.org.
    7. Roman Goncharenko, 2022. "Fighting Fire with Gasoline: CoCos in Lieu of Equity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(2-3), pages 493-517, March.
    8. Giovanni Calice & Carlo Sala & Daniele Tantari, 2020. "Contingent Convertible Bonds in Financial Networks," Papers 2009.00062, arXiv.org, revised Dec 2023.
    9. Gaëtan Le Quang, 2019. "Mind the Conversion Risk: a Theoretical Assessment of Contingent Convertible Bonds," Working Papers hal-04141886, HAL.
    10. Maxi Günnewig & Yuliyan Mitkov, 2024. "Optimal Banking Arrangements: Liquidity Creation Without Financial Fragility," CRC TR 224 Discussion Paper Series crctr224_2024_605, University of Bonn and University of Mannheim, Germany.
    11. Yang, Bo & Gan, Liu, 2021. "Contingent capital, Tobin’s q and corporate capital structure," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    12. Ye Li & Simon Mayer & Simon Mayer, 2021. "Money Creation in Decentralized Finance: A Dynamic Model of Stablecoin and Crypto Shadow Banking," CESifo Working Paper Series 9260, CESifo.
    13. Ioana Neamtu, 2020. "Multiple buffer CoCos and their impact on financial stability," Tinbergen Institute Discussion Papers 20-010/IV, Tinbergen Institute.

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