How Do Options Add Value? Evidence from the Convertible Bond Market. (18th January 2022)

• Record Type: Journal Article
• Authors: Lee, Inmoo; Renjie, Rex Wang; Verwijmeren, Patrick
• Is Part Of: Review of finance. Volume 27:Number 1(2023)
• Page Start: 189
• Page End: 222
• Publication Date: 2022-01-18
• Subjects: option listing -- cost of financing -- convertible bonds -- information environment; G14 -- G23 -- G32; Finance -- Europe -- Periodicals; Financiën; Finance; Periodicals; 332.09405
• DOI: 10.1093/rof/rfac001
• Languages: English
• ISSNs: 1572-3097

Abstract

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.