Abstract
It is generally believed there is an equilibrium problem associated with contingent capital (CC) with a stock price trigger. In this paper I show that the problem instead reflects an internal inconsistency in the specification of the boundary conditions for conversion. A unique equilibrium will exist for CC with a stock price trigger which penalizes stockholders on conversion. A stock price trigger is ill defined for CC which penalizes CC holders on conversion but a unique equilibrium will exist if the price of the CC rather than the price of the stock is used as the trigger for conversion.
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