Options, Equity Risks, and the Value of Capital Structure Adjustments

63 Pages Posted: 17 Nov 2013 Last revised: 17 Nov 2016

See all articles by Paul Borochin

Paul Borochin

University of Miami - Department of Finance

Jie Yang

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: October 29, 2016

Abstract

We use exchange-traded options to identify risks relevant to capital structure adjustments in firms. These forward-looking market-based risk measures provide significant explanatory power in predicting net leverage changes in excess of accounting data. They matter most during contractionary periods and for growth firms. We form market-based indices that capture firms' magnitudes of, and propensity for, net leverage increases. Firms with larger predicted leverage increases outperform firms with lower predicted increases by 3.1% to 3.9% per year in buy-and-hold abnormal returns. Finally, consistent with the quality, leverage, and distress risk puzzles, firms with lower predicted leverage increases are riskier but earn lower abnormal returns.

Keywords: Capital Structure, Financial Leverage, Options, Implied Volatility

JEL Classification: G30, G32, G12, G14

Suggested Citation

Borochin, Paul and Yang, Jie, Options, Equity Risks, and the Value of Capital Structure Adjustments (October 29, 2016). Journal of Corporate Finance, Forthcoming; Georgetown McDonough School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=2355683 or http://dx.doi.org/10.2139/ssrn.2355683

Paul Borochin

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Jie Yang (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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