An Experimental Analysis of Contingent Capital with Market‐Price Triggers

We report an experiment that evaluates three market‐based regimes for triggering the conversion of contingent capital bonds into equity: a “fixed‐trigger” regime, where a price threshold triggers mandatory conversion; a “regulator” regime, where regulators make conversion decisions based on prices; and a “prediction market” regime, where regulators also observe a market that predicts conversion. Consistent with theory, we observe inefficiencies and conversion errors in the fixed‐trigger and regulator regimes. The prediction market somewhat improves the regulator's performance, but inefficiencies and conversion errors persist. The regulator regime has conversion errors over the widest range of shocks.     

Optimal terms of contingent capital,incentive effects,and capital structure dynamics

Contingent Convertible Bonds (CoCos) with conversion ratios that dilute issuer's shareholders generate incentives to preemptively raise equity capital to avoid triggering conversion. Our dynamic model provides an interior solution for the unique optimal conversion ratio and the capital structure policies that maximizes issuer's value net of deadweight costs. Preemptive recapitalization induced by moderately dilutive conversion terms leads to fewer defaults, lower borrowing rates, and higher debt capacity when compared to less dilutive terms. However, highly dilutive conversion ratios do not always enhance efficiency because issuers facing very high dilution risk recapitalize too frequently, generating excessive adjustment costs. Conversely, if CoCo's principal is written-down at the conversion without diluting shareholders, then the issuer will have perverse incentives to destroy a portion of its capital (“burn money”) to force conversion and generate windfall gains for shareholders.     

金融英语——常用词汇（八十三）

兑换平价价格 投资人通过购买可转换证券并行使兑换期权支付给普通股的价格。是指一种转换证券的美元价值与转换成另外一种证券的价值相等。     

关系型交易对审计费用的影响——基于经营风险理论视角

关系型交易模式可能会在议价能力、关系专用性投资成本转换等方面加剧上市公司的经营风险,进而影响审计费用。已有研究主要集中于关系型交易对审计行为的影响,鲜有文献关注其中的作用机制。本文基于经营风险理论视角,选取2008~2017年沪深A股制造业上市公司的相关数据,实证分析了关系型交易对审计费用的影响,结果表明:关系型交易显著加剧了企业经营风险的集聚,进而提升审计费用,即经营风险在关系型交易对审计费用的影响中起到了中介作用。进一步研究,在区分了产权性质以及耐用品特征后,实证结果显示关系型交易与审计费用的正相关关系在非国有企业以及耐用品行业的企业中较为显著,为审计师进行合理审计定价提供了经验证据支持。     

CoCo Bonds,Conversion Prices and Risk Shifting Incentives. How Does the Conversion Ratio Affect Management's Behaviour?

The aim of this paper is to analyze risk shifting incentives for managers and shareholders of the financial institution issuing a CoCo bond. We assess the role of the conversion price settlement in enhancing both shareholders’ and management's discipline. Three recent contingent reverse convertible deals are analyzed, with the intention of showing how shareholder conversion returns are linked to the conversion ratio. The findings demonstrate that, in the case of an ingoing or ongoing crisis, a poor settlement of the conversion ratio could exacerbate both debt overhang and risk shifting issues. This will end in discouraging bank management from issuing new equity and from investing in low risk assets. We argue that a contingent bond triggered on Basel III capital requirement ratios and having a significantly discounted conversion price reduces risk shifting incentives. Moreover, we illustrate how the unexpected wealth transfers between CoCo bondholders and shareholders tends to zero when the bond face value is higher than the current stock market price and there is a concentration of bond subscribers. Accordingly, regulators should consider and oversee not only the conversion trigger but also all the other features of a contingent capital security, especially the conversion ratio.     

Enhanced equity-credit modelling for contingent convertibles

Contingent convertible (CoCo) bonds are characterized by forced equity conversion under either an accounting or regulatory trigger. The accounting trigger occurs when the capital ratio of the issuing bank falls below some contractual threshold. Under the regulatory trigger, sometimes called the point-of-non-viability (PONV) trigger, the regulatory authority may enforce equity conversion when the financial health of the bank deteriorates to certain distressed level. In this paper, we propose an equity-credit modelling of the joint process of the stock price and the capital ratio that integrates both a structural approach for the accounting trigger and a reduced-form approach for the PONV trigger of equity conversion. We also construct effective Fortet algorithms and finite difference schemes for numerical pricing of CoCo bonds under various forms of equity conversion pay-off. The pricing properties of CoCo bonds are examined under different assumptions for the state-dependent intensity of the PONV trigger, the contractual specifications and market conditions.     

The information content of a convertible debt offer announcement

We develop a model of convertible debt financing that combines issue and call decisions into a common framework. The model suggests a role for refinancing costs in a manager's efforts to signal firm productivity to investors by an appropriate choice of debt issue terms. A cross section of convertible debt offers can be divided into two groups: a high conversion ratio group and a low conversion ratio group. The model predicts that high conversion ratios are negatively correlated with offer announcement stock returns and low conversion ratios are uncorrelated with offer announcement stock returns. The model is tested on a sample of 124 convertible debt offer announcements. Test results support model accuracy.     

The information content of a convertible debt offer announcement

We develop a model of convertible debt financing that combines issue and call decisions into a common framework. The model suggests a role for refinancing costs in a manager's efforts to signal firm productivity to investors by an appropriate choice of debt issue terms. A cross section of convertible debt offers can be divided into two groups: a high conversion ratio group and a low conversion ratio group. The model predicts that high conversion ratios are negatively correlated with offer announcement stock returns and low conversion ratios are uncorrelated with offer announcement stock returns. The model is tested on a sample of 124 convertible debt offer announcements. Test results support model accuracy.     

Convertible Debt: Corporate Call Policy and Voluntary Conversion

This paper examines why, in contrast to the predictions of finance theory, firms do not call convertible debt when the conversion price exceeds the call price. The empirical results suggest that the principal reason is because some firms enjoy an advantage of paying less in after-tax interest than they would pay in dividends were the bond converted. This cash flow incentive is the inverse of an investor's incentive to convert voluntarily if the converted dividends are greater than the bond's coupon. Because of taxation, however, the decisions by investors and firms are not symmetric, and there exist bonds which the firm may not call and an investor will not convert. The results also find that voluntary conversion is significantly related to both the conversion price and the differential between the coupon and the dividends on the converted stock.     

Real option valuation of abandoned farmland

This paper investigates the decision-making process of an owner of abandoned farmland that is currently restricted to agricultural use but will be available for nonagricultural use in the future. I make a real option valuation of the abandoned farmland taking prospective land conversion into consideration. Results from the model calibration demonstrate that a slight probability of land conversion greatly increases the land value and discourages the owner from cultivating the land. Further, the results show that a small gap in the anticipation of land conversion prevents the owner from selling or leasing the land to a more efficient farmer.     

An analysis of nondeductible IRA contributions and Roth IRA conversions

On average investors have an income replacement rate of 64% of their pre-retirement income, which in many cases results in a lower tax rate in retirement. We analyze the impact of declining withdrawal tax rates on the choice between taxable mutual fund investments and nondeductible IRAs. The relative attractiveness of the taxable mutual fund option declines significantly when withdrawal tax rates decline. Converting existing IRAs to Roth IRAs is generally beneficial for investors who remain in the same tax bracket upon withdrawal. For short (long) time horizons and low (high) expected returns, the marginal value of conversion in 1998 is greater (less) than the marginal value of optimal conversion. For investors dropping into the 15% tax bracket, conversion is generally not beneficial unless the conversion is done optimally, the time horizon is long, and the expected return is high. Investors in the 15% tax bracket should convert existing IRA assets.     

基于DEA模型的湖南省农村土地流转经济效益分析

DEA模型实证分析表明,湖南省部分地市农村土地流转效益由于区位、流转后的土地经营使用、市场条件及经济发展程度不同而呈明显差异,且土地流转效益并非随土地流转规模扩大而提高,这缘于土地流转中的各种风险。鉴于此,未来湖南省农村土地流转应该统筹规划、完善农村流通市场、规范相关法律法规及尊重民意稳步推进等。     

Hedging and Coordinated Risk Management: Evidence from Thrift Conversions

We provide an explanation for hedging as a means of allocating rather than reducing risk. We argue that when increases in total risk are costly, firms optimally allocate risk by reducing (increasing) exposure to risks that provide zero (positive) economic rents. Our evidence shows that mutual thrifts that convert to stock institutions increase total risk following conversion, consistent with their increased abilities and incentives for risk taking. They achieve this increase by hedging interest-rate risk and increasing credit risk. We provide some evidence that risk-management activities are related to growth capacity and management compensation structure attained at conversion.     

Converting preference shares: An Australian capital structure innovation

Converting preference shares (prefs) are a hybrid security involving mandatory conversion into a fixed value of ordinary shares (although some issues have an option-like conversion value payoff). This paper explains how prefs can be viewed as equivalent to an ordinary share issue plus a swap contract between “old” and “new” shareholders. This perspective is used to illustrate why prefs financing may be chosen when significant information asymmetries exist between management and outside investors. Other factors motivating the use of prefs are examined and their relevance for particular issuers and for the specific design of prefs securities analysed.     

Disappearing Call Delay and Dividend‐Protected Convertible Bonds

Firms do not historically call their convertible bonds as soon as conversion can be forced. A number of explanations for the delay rely on the size of the dividends that bondholders forgo so long as they do not convert. We investigate an important change in convertible security design, namely, dividend protection of convertible bond issues. Dividend protection means that the conversion value of the convertible bond is unaffected by dividend payments and thus dividend‐related rationales for call delay become moot. We document that call delay is near zero for dividend‐protected convertible bonds.     

Contingent capital conversion under dual asset and equity jump–diffusions

We model contingent capital with market trigger under dual jump–diffusion processes in asset values and equity prices. Under the dual jump–diffusions, we show that the conversion ratio is no longer deterministic under the jump–diffusion. The conversion ratio becomes a stochastic process related to the jump process of the underlying equity and the conditional expectation of the contingent capital at the conversion time. Thus, making the implementation of contingent capital impossible. The best we can hope to practically implement this conversion design, is to give the minimal conversion ratio (at least the portion required to convert) to conform with Basel III.     

金融深化视角下储蓄--投资转化效率的实证研究

储蓄是投资的根本源泉,高的储蓄-投资转化效率可以促进资本形成,进而推动经济增长。而经济的持续增长与金融深化有密切的联系,金融深化对经济增长最基本的贡献就是动员储蓄,提高储蓄-投资转化效率。本文从金融深化的理论基础出发,利用1981-2003年的统计资料分析了金融深化程度与储蓄-投资转化效率的关系,指出了金融抑制是制约储蓄向投资转化的根本原因,并在此基础上提出了通过金融深化提高储蓄-投资转化效率的途径。     

可转债上市公司调整转股价格的行为及影响分析

摘要：可转债是兼有股票期权和债券性质的复合型金融衍生品。为促使投资者尽快将可转债转换为股票,上市公司的常见做法是向下调整转股价格。因此,研究上市公司调整转股价格的行为及其影响十分必要。本文首先分析了现有可转债上市公司近五年调整转股价格的行为及其原因,并将其行为分为自然调整和主动向下修正两类;然后着重研究上市公司主动向下修正转股价格的行为对转股比例、股票价格、可转债价格j者的影响,最后得出相应结论。     

The bright side of market power in Asian banking: Implications of bank capitalization and financial freedom

Using a sample of listed banks in the Asia-Pacific region from 2000 to 2016, this paper documents that higher market power reduces risk taking but increases loan growth and performance in banking. This highlights the "bright side" of bank market power in general. However, the positive effect of market power on bank stability is more pronounced for well-capitalized banks, although their performance tends to decline, and loan growth is unaffected by market power. Hence, bank capitalization plays an important role in strengthening financial stability due to an increase in bank market power. Moreover, banks with higher market power located in countries with a lower degree of financial freedom exhibit lower riskiness, higher loan growth, and better performance. Greater control by authorities in the financial sector is essential, not only to enhance financial stability, but also to boost financial intermediation and bank performance following an increase in bank market power.     

Optimal policies of call with notice period requirement

When an American warrant or a convertible bond is called by its issuer, the holder is usually given a notice period to decide whether to sell the derivative back to the issuer at the call price or to exercise the conversion right. Several earlier papers have shown that such notice period requirement may substantially affect the optimal call policy adopted by the issuer. In this paper, we perform theoretical studies on the impact of the notice period requirement on issuer’s optimal call policy for American warrants and convertible bonds. We also examine how the optimal call policy of the issuer interacts with holder’s optimal conversion policy.