How do options add value? Evidence from the convertible bond market

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Abstract

This paper studies the value relevance of the options market by focusing on convertible bond pricing. Pricing convertible bonds requires essentially the same set of information necessary to price options. Using a regression discontinuity design based on minimum stock price requirements for option listings, we find that the availability of stock options helps issuers attract more convertible bond buyers and reduces convertible issuers’ cost of financing. Our results highlight that the availability of individual stock options can add value to security issuers.
Original languageEnglish
Pages (from-to)189-222
Number of pages34
JournalReview of Finance
Volume27
Issue number1
DOIs
Publication statusPublished - 2022

Bibliographical note

Funding Information:
Number of hedge funds buyers who are identified as hedge funds from the full list of hedge fund managers in Bloomberg, Lipper TASS, and Hedge Fund Research (HFR) databases. Log(HF buyers) is the natural log of the number of hedge funds buyers.

Publisher Copyright:
© The Author(s) 2022. Published by Oxford University Press on behalf of the European Finance Association.

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