Chinese write-down bonds: issuance and bank capital structure

Abstract

This paper investigates the impact of Chinese write-down bond issuance on issuing bank’s capital structure. We divide the capital structure into asset allocation (financial leverage ratio) and capital allocation (the proportion of Tier 1 capital). We find that the issuance of write-down bonds has a positive effect on the issuing bank’s asset allocation, and the effect is relatively greater for lower leveraged banks. The write-down bond issuance has no effect on capital allocation for the whole sample, but it is inversely related to capital allocation for banks with high Tier 1 capital ratios. For banks that have issued write-down bonds, the issuing amount of write-down bonds has a significant impact on asset allocation, while the impact on capital allocation is not significant. Since write-down bonds are considered to be gone concern capital, and Tier 1 capital is considered to be going concern capital, the issuance of write-down bonds has no significant effect on the proportion of Tier 1 capital for the whole sample.

Keywords:

• Write-down bonds
• Issuance
• Capital allocation
• Asset allocation

JEL Classification:

• G21
• G28
• G32

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work is supported by the National Natural Science Foundation of China (No. 71571008, No. 71901198).