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Contingent capital, Tobin’s q and corporate capital structure

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  • Yang, Bo
  • Gan, Liu

Abstract

This paper examines the impact of contingent convertible (CoCo) financing on a firm’s Tobin’s q. We first construct an endogenous dynamic investment and capital accumulation model for pricing firm bonds under CoCo financing based on the neoclassical investment q theory and derive its semi-closed expression. Then, we numerically explore the mechanism by which CoCo financing affects the firm’s industrial investment strategy and Tobin’s q under the firm’s optimal capital structure. We prove the following: (i) After the conversion of CoCo, the measurement error between the Tobin’s average q and the Tobin’s marginal q decreases along with the increase in the firm’s capital stock, which echoes a variety of classical studies. (ii) However, before the conversion, a significant gap appears between Tobin’s marginal q and Tobin’s average q. And in this case the firm’s investment level is relatively low. (iii) Compared with ordinary debt financing, the combined financing mode of CoCo and ordinary debt can effectively alleviate the debt overhang problem and eventually improve firms’ value.

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  • 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).
    • Handle: RePEc:eee:ecofin:v:55:y:2021:i:c:s1062940820301935
    DOI: 10.1016/j.najef.2020.101305
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    More about this item

    Keywords

    CoCo; Industrial investment; Tobin’s q; Capital structure;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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