Participating Contingent Convertible Bonds And The Impact On Company

The paper proposes participating contingent convertible bonds (P-CCB), a new contingent capital based on contingent convertible bonds (CCB) and obtains the precision price of the new contingent capital by developing mathematical financial models and using dynamic asset pricing theory. Simultaneously, the paper analyzes the influence of the company issuing P-CCB in terms of firm total value and risk-shifting incentive.Firstly, by developing mathematical financial models and using dynamic asset pricing theory, we obtain the price of participating contingent convertible bonds and analyze the relationship between its price and various parameters. Numerical results show that, the price first increases and then decreases with the increasing coupon rate; the price is linearly increasing with the proportion of dividends and the company’s cash flow; with the increase of the company’s risk, the price decreases and then increases when it reaches its minimum.Secondly, we find that compared with issuing contingent convertible bonds and straight bonds under the same financing costs, issuing P-CCB can increase the firm’s value to some extent. Meanwhile, when the company is in a different operating environment, the company will make a different financing options to increase the firm value. That’s to say, when the company is in low-risk business environment, company will choose to issue CCB; when the company is in high-risk business environment, company will choose to issue P-CCB.Finally, compared with issuing contingent convertible bonds and straight bonds, we find that issuing P-CCB and CCB can restrain risk-shifting incentive, and even can eliminate them by choosing the appropriate strategy. But there is no risk-shifting incentive to withstand a wider range of performance and risk by issuing P-CCB.