Contingent Capital, Tail Risk, and Debt-Induced Collapse

• 成果类型: Article
• 署名作者: Chen, Nan; Glasserman, Paul; Nouri, Behzad; Pelger, Markus
• 署名单位: Chinese University of Hong Kong; Columbia University; Stanford University
• 刊物名称: REVIEW OF FINANCIAL STUDIES
• ISSN/ISSBN: 0893-9454
• DOI: 10.1093/rfs/hhx067
• 发表日期: 2017
• 页码: 3921
• 关键词: CORPORATE-DEBT; credit spreads; trigger; MODEL

摘要

We study the design and incentive effects of contingent convertible debt. With contingent convertibles, the endogenous bankruptcy boundary can be at either of two levels: one with lower default risk or one at which default precedes conversion. An increase in debt moves the firm from the first regime to the second, a phenomenon we call debt-induced collapse. Setting the conversion trigger sufficiently high avoids this hazard. Given this condition, we investigate the effect of contingent capital and debt maturity on optimal capital structure, debt overhang, and asset substitution. We calibrate the model to large banks during the financial crisis.