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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | The Issuance of Contingent Convertible Bonds and Risk-Taking Behavior |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 63 |
| Date | 2018 |
| Abstract Text | Contingent convertible (coco) bonds gained in importance with the increased regulatory capital requirements following the financial crisis. The Basel III framework allows banks to meet a certain degree of the capital requirements with coco bonds. These financial instruments have various design features which lead to a heterogeneous variability of instruments. In a first part, this thesis discusses the design features and examines the respective incentives they provide based on existing literature. A main characteristic of coco bonds is the loss absorption mechanism. This mechanism is activated, once a certain triggering threshold is breached. Depending on this loss absorption mechanism, the triggering event potentially leads to wealth-transfers between coco bond investors and shareholders. Thus, wealth may either transfer from coco bond investors to shareholders or vice versa or not at all. In an empirical investigation, this thesis finds that the majority of examined coco bonds would lead to a wealth-transfer from coco bond investors to shareholders. This finding implicates that moral hazard arises and coco bond issuers are incentivized to take more risk after a coco bond issuance. This thesis finds that the average coco bond issuer takes more risk than expected in the year after the coco bond issuance. This effect is stronger for the average issuer of a principal write-down coco bond compared to the average issuer of coco bonds with a mandatory conversion. However, this thesis finds no statistically significant relation between the coco bond’s estimated wealth-transfer and the abnormal risk the issuer takes. |
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