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How Do Options Add Value? Evidence from the Convertible Bond Market

Author

Listed:
  • Inmoo Lee
  • Rex Wang Renjie
  • Patrick Verwijmeren

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.

Suggested Citation

  • Inmoo Lee & Rex Wang Renjie & Patrick Verwijmeren, 2023. "How Do Options Add Value? Evidence from the Convertible Bond Market," Review of Finance, European Finance Association, vol. 27(1), pages 189-222.
    • Handle: RePEc:oup:revfin:v:27:y:2023:i:1:p:189-222.
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    References listed on IDEAS

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    Cited by:

    1. Fung, Scott & Loveland, Robert, 2024. "Option trading activity and capital reallocation efficiency: Evidence from corporate restructurings," Finance Research Letters, Elsevier, vol. 66(C).

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    More about this item

    Keywords

    option listing; cost of financing; convertible bonds; information environment;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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