Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5084545 | International Review of Financial Analysis | 2015 | 39 Pages |
Abstract
We examine a new type of contingent capital, called contingent convertible security (CCS), when the asset value of the issuing firm follows a jump-diffusion process. The merit of CCS is that it can dynamically adjust capital structure almost without incurring adjustment costs. We obtain closed-form expressions of the equilibrium prices of all corporate securities. Compared with a standard capital structure, CCS can lead to as much as a 9.5% increase in the issuing firm's value but the number declines to 5.7% if classical contingent convertible bond (CCB) is issued instead of CCS. The larger the investment risk, the more pronounced the advantage of CCS over straight bond and CCB. In our model, CCS does not suffer the debt overhang problem and shareholders have no risk-shifting incentive to increase the diffusive volatility of asset value, though they benefit from a higher jump risk.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Zhaojun Yang, Zhiming Zhao,