Because conversion carries a threat of loss and implicit dilution of stock holdings, contingent capital reduces shareholders' incentive to push management toward higher risk in pursuit of higher returns.
Source quote, verbatim
Moreover, given the threat of loss due to conversion and the implicit dilution of stock holdings, contingent capital has the potential to reduce incentives for shareholders to encourage management to take higher risks for higher returns.
From
Christoph K. Henkel, Wulf A. Kaal, Contingent Capital in European Union Bank Restructuring (2012), IV. CONTINGENT CAPITAL IN BANK RESTRUCTURING, p. 53 https://ssrn.com/abstract=2061166 · source PDF
Cite as
Christoph K. Henkel, Wulf A. Kaal, Contingent Capital in European Union Bank Restructuring (2012). SSRN: https://ssrn.com/abstract=2061166
Holds when
conversion terms that dilute existing equity holders
restateskaal:claim:1908473-018 The threat of loss on conversion and the implicit dilution of existing stock holdings reduce shareholders' inc...
restateskaal:claim:1998455-010 The threat of dilution of stock holdings, combined with the threat of loss on conversion, reduces the pressure...
restated_bykaal:claim:2957645-022 The threat of dilution of stock holdings, combined with the threat of loss upon conversion, could help reduce ...
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