The Study Of Contingent Convertible Bond Pricing And Principal-agent Problem Under Incomplete Information

After the global financial crisis in 2008,contingent convertible bond should be shipped out as a new financial derivative product.Since contingent convertible bond can effectively prevent the further deterioration of financial crisis and improve the ability of financial institutions to resist risks,its concept has attracted extensive attention from government regulators,industry and academia of various countries.The earliest financial institution in China to issue the Chinese version of contingent capital — write-down contingent capital is Tianjin Binhai rural commercial bank,which issued the write-down contingent capital worth 1.5 billion yuan in July 2013,thus kicking off the issuance of write-down contingent capital by financial institutions in China.Since then,Chinese financial institutions have put forward the plan of issuing contingent convertible bond one after another,including China development bank,five state-owned Banks — bank of China,China agricultural,China industrial,China Construction and bank of Communications,China Everbright bank and CIB,and dozens of urban and rural commercial banks.Up to April 2019,nearly all Banks in China have issued contingent convertible bond.However,most of the issuing banks in China are non-listed such as urban commercial banks or rural commercial banks.These small and medium-sized banks have problems such as inability to timely disclose information and lack of supervision.Thus,Market participants in the context of incomplete information economy,unable to thoroughly analyze its terms and values,or capital pricing and design issues are more challenging.In this context,this paper intends to explore the theoretical pricing model of contingent convertible bond under the condition of incomplete information,hoping to provide reference for the design and innovation of contingent convertible bond and related financial derivatives with a short history of development.This paper first reviews the domestic and foreign research on contingent convertible bond.Then,after introducing the related nature of contingent convertible bond and its issuance in China,this paper considers two types of incomplete information: information delay and information asymmetry,then introduces contingent capital into the analysis framework.On this basis,we first study the pricing of contingent capital and the credit spreads under incomplete information,and next discuss the principal-agent problem about the pricing of write-down contingent capital and related principal-agent problem under delayed information based on Chinese actual economic problems.The research content includes the following two aspects.First,this paper assumes that the process of corporate cash flow follows a jump diffusion process,and studies the problem of contingent convertible bond pricing and bond credit spread.Then,we carry out numerical simulation on contingent convertible bond.The numerical results show that: under the structured model of financial market including jump risk,compared with the standard capital structure,the introduction of contingent convertible bond can significantly reduce the cost of corporate bankruptcy under the condition of incomplete information,increase the total value of the company,and reduce the loss of social welfare.contingent convertible bond can enhance the equity value,reduce the credit spread of bonds,and enhance the company's ability to resist risks.Second,it is assumed that the capital structure of the company consists of ordinary bonds,write-down contingent capital and equity.The executive compensation includes fixed salary and contingent compensation bonus under the delay information.Then,we study the pricing of write-down contingent convertible bonds and get some conclusions after analysis: issuing write-down convertible bonds combined with contingent cash compensation incentives can significantly and effectively control the risk motivation of managers;Meanwhile,companies and regulators can adjust the risk motivation of managers respectively by adjusting the compensation structure and adjusting the write-down trigger gate,so as to reduce the principal-agent problem.