Which Factors Play a Role in CoCo Issuance? Evidence from European Banks

This article explores the reasons why some banks issue Contingent Convertible (CoCo) bonds, but others do not. To this end, we use a binary logistic model and control for the determinants suggested by the literature. Our findings suggest that larger banks and those with higher Tier 1 capital, higher net loans, higher wholesale funding, lower levels of leverage, and lower risk-weighted assets have a higher tendency to issue CoCos and were the early adopters of this novel financing instrument. Our results also suggest that banks in countries with higher annual growth rate of GDP per capita and those listed as Globally Systematically Important Banks (G-SIBs) were more likely to issue CoCos. These results are difficult to explain by traditional capital structure theory, which assumes that companies voluntarily choose their optimal capital structures, but suggest that banks were more likely to be encouraged or nudged to issue CoCos by following regulators’ advice.