Abstract
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.
Authors
- Douglas Davis
- Edward Simpson Prescott
JEL codes
- C92
- G14
- G28