The Eurasia Proceedings of Educational and Social Sciences, Dec 14, 2022
This paper discusses a theoretical explanation that relies on investment within the framework of ... more This paper discusses a theoretical explanation that relies on investment within the framework of a regime-switching structural model whose investment cost is financed by equity and CoCos. The unexpected return of the project is governed by a continuous and temporal Markov chain. Explicit solutions have been proposed under a regime-switching structural model when the value of the cash flows generated by the firm follows a double-exponential step-distribution diffusion process. The equilibrium price theory under the jump diffusion model was developed using the structural model introduced by Leland (1994) and later extended by Kou (2002) and Chen and Kou (2009). The study focused on the influence of contingent convertibles on investment and financing policies and the inefficiencies related to debt overhang and asset substitution in the presence of an investment option.
PurposeThe objective of this paper is twofold: first, to model the value of the firm in the prese... more PurposeThe objective of this paper is twofold: first, to model the value of the firm in the presence of contingent capital and multiple growth options over its life cycle in a stochastic universe to ensure financial stability and recover losses in case of default and second, to clarify how contingent convertible (CoCo) bonds as financial instruments impact the leverage-ratio policies, inefficiencies generated by debt overhang and asset substitution for a firm that has multiple growth options. Additionally, what is its impact on investment timing, capital structure and asset volatility?Design/methodology/approachThe current paper elaborates the modeling of a dynamic problem with respect to the interaction between funding and investment policies during multiple sequential investment cycles simultaneously with dynamic funding. The authors model the value of the firm in the presence of contingent capital that provides flexibility in dealing with default risks as well as growth options i...
This paper is based on the study of Hilscher and Raviv [7] and Tan and Yang [19] to investigate t... more This paper is based on the study of Hilscher and Raviv [7] and Tan and Yang [19] to investigate the effects of contingent capital, a debt instrument that automatically converts into equity if the value of the asset is below a predetermined threshold on the pricing process of a bank assets'. A traceable form of the contingent convertible bond is analyzed to find a closed-form solution for the price of this bond using barrier and growth options. We represent its characteristics and examine the interaction between growth options and financing policy in a dynamic business model. We study how the contingent capital can be an effective tool for elaborating investment program, capital structure mix and stabilizing financial institutions. The potential benefits from contingent capital as financing and risk management instrument can be assessed through their contribution to reducing the probability of default associated to the subordinated debt. The appropriate choice of contingent capital parameters, the rate, and the conversion threshold can reduce shareholders incentives to change risk.
The main objective of this study is to determine a lease agreement to finance an investment proje... more The main objective of this study is to determine a lease agreement to finance an investment project and a solution for managing credit risk. This study investigates three types of contingent leases to reduce the costs associated with bankruptcy and compensate for the lessor's position. A leasing defaultable contract allows the lessor to obtain the rent that will be recovered if the lessee defaults. A leasing convertible contract can be automatically converted into shares when certain default conditions related to the cash flows generated by the firm are met. These conditions are triggered by the ratio of the firm's value and leasing payments. A Defaultable-Convertible-Leasing contract with a payback option grants the lessor the right but not the obligation to convert the remaining lease payments into stocks or to break up the contract and pick up the rented equipment when the firm reaches the default threshold. These contracts are motivated by contributing to the range of ri...
The Eurasia Proceedings of Educational and Social Sciences, Dec 14, 2022
This paper discusses a theoretical explanation that relies on investment within the framework of ... more This paper discusses a theoretical explanation that relies on investment within the framework of a regime-switching structural model whose investment cost is financed by equity and CoCos. The unexpected return of the project is governed by a continuous and temporal Markov chain. Explicit solutions have been proposed under a regime-switching structural model when the value of the cash flows generated by the firm follows a double-exponential step-distribution diffusion process. The equilibrium price theory under the jump diffusion model was developed using the structural model introduced by Leland (1994) and later extended by Kou (2002) and Chen and Kou (2009). The study focused on the influence of contingent convertibles on investment and financing policies and the inefficiencies related to debt overhang and asset substitution in the presence of an investment option.
PurposeThe objective of this paper is twofold: first, to model the value of the firm in the prese... more PurposeThe objective of this paper is twofold: first, to model the value of the firm in the presence of contingent capital and multiple growth options over its life cycle in a stochastic universe to ensure financial stability and recover losses in case of default and second, to clarify how contingent convertible (CoCo) bonds as financial instruments impact the leverage-ratio policies, inefficiencies generated by debt overhang and asset substitution for a firm that has multiple growth options. Additionally, what is its impact on investment timing, capital structure and asset volatility?Design/methodology/approachThe current paper elaborates the modeling of a dynamic problem with respect to the interaction between funding and investment policies during multiple sequential investment cycles simultaneously with dynamic funding. The authors model the value of the firm in the presence of contingent capital that provides flexibility in dealing with default risks as well as growth options i...
This paper is based on the study of Hilscher and Raviv [7] and Tan and Yang [19] to investigate t... more This paper is based on the study of Hilscher and Raviv [7] and Tan and Yang [19] to investigate the effects of contingent capital, a debt instrument that automatically converts into equity if the value of the asset is below a predetermined threshold on the pricing process of a bank assets'. A traceable form of the contingent convertible bond is analyzed to find a closed-form solution for the price of this bond using barrier and growth options. We represent its characteristics and examine the interaction between growth options and financing policy in a dynamic business model. We study how the contingent capital can be an effective tool for elaborating investment program, capital structure mix and stabilizing financial institutions. The potential benefits from contingent capital as financing and risk management instrument can be assessed through their contribution to reducing the probability of default associated to the subordinated debt. The appropriate choice of contingent capital parameters, the rate, and the conversion threshold can reduce shareholders incentives to change risk.
The main objective of this study is to determine a lease agreement to finance an investment proje... more The main objective of this study is to determine a lease agreement to finance an investment project and a solution for managing credit risk. This study investigates three types of contingent leases to reduce the costs associated with bankruptcy and compensate for the lessor's position. A leasing defaultable contract allows the lessor to obtain the rent that will be recovered if the lessee defaults. A leasing convertible contract can be automatically converted into shares when certain default conditions related to the cash flows generated by the firm are met. These conditions are triggered by the ratio of the firm's value and leasing payments. A Defaultable-Convertible-Leasing contract with a payback option grants the lessor the right but not the obligation to convert the remaining lease payments into stocks or to break up the contract and pick up the rented equipment when the firm reaches the default threshold. These contracts are motivated by contributing to the range of ri...
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