The Effect Of Contingent Convertible Bonds On Bank Investment And Financing Under Asymmetric Information

Contingent convertible bonds which have anti-risk ability can help financial institutions effectively coping with the financial crisis,so this financial derivative tool has been widely concerned by society.Globally,Lloyds banking group took the lead in issuing contingent convertible bonds in 2009,followed by major financial institutions.Domestically,the application of contingent convertible bonds started in 2013 in Tianjin Binhai Rural Commercial Bank Corporation.It can be seen that the issuance history in China is only 7 years,the issuance time is relatively short.In addition,domestic issuers are mostly small and medium-sized Banks with inadequate information disclosure and supervision,which leads to the weak applicability of existing research results on contingent convertible bonds to domestic institutions.Thus,we provide an in-depth answer to the question of how to use contingent convertible bonds to maximize the value of investment options for small and medium-sized Banks,so as to help them make better investment and financing decisions.We firstly review the domestic and foreign research of contingent convertible bonds and finds that the existing research mainly relies on the complete information capital market.Then,we introduce the signal game model in information asymmetry environment.On the basis of two theories,we study the pricing model of bank securities in a complete information environment.It is worth noting that in order to highlight the excellent characteristics of contingent convertible bonds,two other financing instruments-equity and ordinary bonds-are selected for comparison with contingent convertible bonds.Theoretical model analysis and numerical calculation analysis lay the foundation for the following research.Furthermore,we analyze the pricing of three financing instruments and investment and financing decisions under asymmetric information,and explain how information asymmetry affects the decisionmaking of Banks and the role of contingent convertible bonds in the decision-making mechanism from the perspective of investment timing and capital structure.In addition,we carried out sensitivity analysis of bank investment and financing decisions to market parameters through MATLAB program.The innovation of this study is introducing the asymmetric information to convertible bond analysis framework,studying investment and financing decision-making mechanism of bank under asymmetric information through signal game model,giving the influence of contingent convertible bonds on the bank in investment and financing decisions.Through analysis,it is found that banks with positive private information can transfer information to external investors by investment and finance choice.In addition,the study found that the contingent convertible bond significantly increased the value of the bank,made banks invest earlier.More importantly,contingent convertible bonds alleviate the degree of distortion of bank investment under information asymmetry and improve the robustness of bank operation.