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

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 li...

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Bibliographic Details
Published in:Review of Finance 2023-02, Vol.27 (1), p.189-222
Main Authors: Lee, Inmoo, Renjie, Rex Wang, Verwijmeren, Patrick
Format: Article
Language:English
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Summary: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.
ISSN:1572-3097
1875-824X
DOI:10.1093/rof/rfac001