How Do Options Add Value? Evidence from the Convertible Bond Market
46 Pages Posted: 15 Jan 2021 Last revised: 3 Mar 2021
Date Written: October 9, 2020
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: Suggested Citation