The Impact of Contingent Convertible Bond Issuance on Bank Credit Risk
The Impact of Contingent Convertible Bond Issuance on Bank Credit Risk

Author(s): Oleg Deev, Vlad Morosan
Subject(s): Business Economy / Management, Financial Markets
Published by: Masarykova univerzita nakladatelství
Keywords: contingent convertible bonds; event study; CDS prices; bank credit risk;
Summary/Abstract: Contingent convertible bonds are designed to provide additional capital to banks in times of distress and discourage the risk-taking incentives of the stockholders and, hence, decrease bank credit risk. In this paper, we study bank CDS spreads as a proxy of credit risk during the periods around the announcement of contingent convertible bond issuance. We analyze whether investors see these bonds as signs of possible bank distress or the stabilizing mechanism decreasing the probability of bank default. We use event study methodology where abnormal CDS spreads are identified based on constant mean return model and basic market model. Our data sample consists of 41 banks with 109 current unique issues taken from Bloomberg. Our results indicate that CDS spreads show a systemic reaction to the announcement of contingent convertible instruments and are economically significant for the bond holders that value the decreased default probability and reduced risk incentives of the issuing institution.

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