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

46 Pages Posted: 15 Jan 2021 Last revised: 3 Mar 2021

See all articles by Inmoo Lee

Inmoo Lee

KAIST College of Business

Rex Wang Renjie

VU Amsterdam; Tinbergen Institute

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: October 9, 2020

Abstract

This paper provides evidence that the availability of individual stock options adds value to security issuers. We focus on convertible bond issues because pricing convertible bonds requires essentially the same set of information necessary to price options. By exploiting the SEC’s minimum stock price requirement for option listing to employ a regression discontinuity design, we find that the availability of stock options significantly affects the pricing of convertible bonds. In line with options providing information, the effect is stronger when the overall information environment is poor. Listed options help issuers attract more convertible bond buyers and reduce the cost of financing. Overall, our results highlight the value relevance of the options market.

JEL Classification: G30, G32, G34

Suggested Citation

Lee, Inmoo and Wang, Renjie and Verwijmeren, Patrick, How Do Options Add Value? Evidence from the Convertible Bond Market (October 9, 2020). Available at SSRN: https://ssrn.com/abstract=3708140 or http://dx.doi.org/10.2139/ssrn.3708140

Inmoo Lee

KAIST College of Business ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 02455
Korea, Republic of (South Korea)

Renjie Wang (Contact Author)

VU Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31205986768 (Phone)

HOME PAGE: http://rexwangrenjie.weebly.com/

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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