June 2017 issue contents
Fixed Prices and Regulatory Discretion as Triggers for Contingent Capital Conversion: An Experimantal Examination

by Douglas Davisa and Edward Simpson Prescottb


We report a laboratory experiment that evaluates two price-based mechanisms for triggering the conversion of contingent-capital bonds into equity: a regulator who decides based on observed prices and a mechanistic fixed-price trigger. We find that when conversion decreases incumbent equity value, the regulator mechanism generates fewer conversion errors, particularly in environments where incentives bias a regulator against conversion and where a regulator receives his own signal. In contrast, when conversion increases incumbent equity value, a fixed-price trigger generates fewer conversion errors in these environments as well as when the regulator has the option to delay conversion.

JEL Codes: C92, G14, G28.

Full article (PDF, 39 pages, 519 kb)

Online Appendix (PDF, 52 pages, 715 kb)


a Virginia Commonwealth University 
b Federal Reserve Bank of Cleveland