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Contingent capital with repeated interconversion between debt‐ and equity‐like instruments
Author(s) -
Cai Yanping,
Yang Zhaojun,
Zhao Zhiming
Publication year - 2019
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12165
Subject(s) - coupon , debt , equity (law) , bond , cash flow , monetary economics , economics , capital structure , convertible , geometric brownian motion , capital (architecture) , financial economics , business , finance , economy , structural engineering , diffusion process , service (business) , archaeology , political science , law , history , engineering
This paper introduces a new form of contingent capital, contingent convertible securities (CCSs), which might repeatedly convert between debt‐ and equity‐like instruments depending on financial conditions. We derive explicit prices of corporate securities, assuming the cash flow is modeled as a geometric Brownian motion. We present an explicit value of the increased tax shields due to CCSs. We provide an explicit optimal capital structure when CCSs are issued and interestingly, the ratio of the optimal straight bond coupon to CCS coupon is constant and independent of the firm's financial conditions. All the conclusions hold true also for contingent convertibles.