Abstract: Most of domestic banks have issued Write-down Contingent Capital Bonds (write-down CoCo bonds). Intuitively, such a new contingent capital must induce a considerable adventure motivation of managers under the fixed wage and equity incentive compensation structure. To mitigate and even completely eliminate this incentive, contingent cash compensation is taken as a manager's long-term incentive fee and a new scheme of managerial contingent compensation is established. The effects of write-down CoCo bonds issuance and managerial contingent compensation design on managers' risk-taking motivation are studied. The value of the issuing company, the ruin probability, bankruptcy cost, and the risk premium of the common bond. Closed-form solutions of the values of the write-down CoCo bonds and managerial wealth are obtained under a risk-neutral probability measure. By numerical simulations, it is found that write-down CoCo bonds increase the value of the issuing company by reducing their bankruptcy probability, but enhance the managers' adventure motivation. In contrast, the managerial contingent cash income can restrain this motive. In addition, shareholders of the issuing company can adjust the amount of contingent cash compensation or the fraction of equity to control the adventure motivation of managers and in particular, regulators are able to control the risk of the banking system by adjusting the trigger level to write down. Therefore, our analysis has theoretical and practical guiding significance for risk management problems of the issuer and bank regulators, and it is helpful to the current reform in the financial institution compensation of managers.

Key words: write-down contingent capital bonds, managerial contingent cash income, managerial compensation design, adventure motivation, ruin probability