An examination of investors’ reaction to the announcement of CoCo bonds issuance: A global outlook

Abstract

Major international financial institutions (FIs) are using contingent convertible (CoCo) bonds in the wake of the 2008 financial crisis to meet stricter national and international capital requirements. Beginning with UniCredit's €500m 9.375% CoCo in July 2010, more than 40 publically held financial institutions headquartered in 16 countries have issued 68 CoCos. This paper examines investors' reactions to the announcements of CoCo bonds issuances by FIs. Using event-study methodology and measuring cumulative abnormal returns (CARs) following the announcements, we find FIs generally experience negative abnormal returns during the post-announcement period; however, the investors' reactions vary in a country-by-country analysis. These different reactions allow the potential for investors to launch global diversification and trading strategies.

Market Reaction to the Issuance of Capital Instruments by Brazilian Banks

“…The determinations of the Basil Accords and their effects have been the object of considerable attention on the part of researchers and players in the market, because of the importance of their guidelines in ensuring the solidity and stability of the financial markets, as well as their wide scope -since they have been adopted by numerous countries in different continents. This is particularly the case in regards to the effects of issuing instruments to meet the requirements of capital, the object of this study, and have been found in some other studies in the international sphere, among which attention should be drawn to those of Schmidt and Azarmi (2015), Avdjiev et al (2015), Ammann et al (2017) and Liao et al (2017). As all these studies were based on instruments with a convertibility clause, the IDECs that are designated CoCos.…”

“…Another similar study was carried out by Liao et al (2017), which employed a study of key events to analyze the effects of 68 announcements of the issuance of CoCos, for 46 banks in 16 countries -China, Australia, India, Malaysia and 12 European countries -in the period 2010 -2014. After estimating the Cumulative abnormal return -CAR) in the period of 15 days before and 15 days after the announcements of the issuance of CoCos, the authors found out that the banks usually experience negative abnormal returns in the immediate aftermath of the announcement.…”

“…However, in their analysis of data per country, Liao et al (2017) discovered that there is not a uniform reaction by the investors to the announcement of the issuance of CoCos. In some markets, like Australia, India, Britain, and Switzerland, the investors reacted negatively during 15 day period following the announcement of the issuances, whereas in other countries such as Germany and Spain, they responded positively.…”

“…In some markets, like Australia, India, Britain, and Switzerland, the investors reacted negatively during 15 day period following the announcement of the issuances, whereas in other countries such as Germany and Spain, they responded positively. In the view of Liao et al (2017), these different reactions create opportunities for investors and the issuers adopted global diversification and trading strategies.…”

“…In view of this duality with regard to the effects of the issuing of IDEC -strengthening capital and allowing the leveraging of business without the need to provide one's own capital, while increasing the cost of fund-raising and an awareness of risk with regard to the issuers -there have been a number of studies in the international sphere such as those of Schmidt and Azarmi (2015), Avdjiev, Bolton, Jiang, Kartasheva and Bogdanova (2015), Ammann, Blickle and Ehmann (2017), and Liao, Mehdian and Rezvanian (2017), that have sought to examine what effect these issues have had on the value of the issuing banks. These studies are based on empirical evidence that is not entirely reliable since there are positive, negative and neutral effects on the issuing banks, a matter that is explored more fully in Section 2.1.…”