[15] Further, with respect to regulatory variables, also the distance‐to‐maximum distributable amount (MDA)‐threshold has been shown to have a negative, economically relevant, and statistically significant influence on CoCo spreads.
[16] In the context of crisis management, contingent convertible bonds have been particularly acknowledged for their potential to prevent systematic collapse of important financial institutions.
[17] If the conversion occurs promptly, a bankruptcy can be entirely prevented due to quick injection of capital which would be impossible to be obtained otherwise, either because of the market or the so-called recapitalization gridlock.
The greater market discipline and more stringent corporate governance are exercised as a result of shareholders’ direct risk of stock dilution in case conversion was triggered.
An argument has been made that making managers’ bonuses in a form of contingent convertible debt instruments could reduce their behavior of excessive risk taking caused by their striving to provide investors with the desired return on equity.
When the trigger is well chosen, automatic conversion reduces leverages precisely when the bank faces high incentives for risk shifting.
[22] On the other hand, contingent capital in a form of convertible bonds remains a largely untested instrument causing fears as to its effects especially during periods of high market volatility and uncertainty.