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Bank Dividend Payouts and Contingent Convertible Bond Issuance

Contingent convertible bonds (CoCos) are the latest bank capital instruments advocated by the Basel Committee on Banking Supervision and many national bank regulators. CoCos are intended to reduce banks’ reliance on government bailouts and have been extensively issued by banks worldwide since the 2008 financial crisis. Analyzing a comprehensive dataset, we find that banks distributing more dividends out of earnings are more likely to issue CoCos. This result is more pronounced when bank shareholders have a stronger preference for dividends. CoCo issuance is not related to regulatory capital ratios for banks that have low dividend payout ratios. Moreover, banks increase dividend payout after CoCo issuance. Our findings identify dividend payout as a novel determinant of CoCo issuance, which is ignored by existing theories and policy debates. Our findings imply that bank shareholder interest is the primary consideration for CoCo issuance.