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

Inmoo Lee | Zendy; Rex Wang Renjie | Zendy; Patrick Verwijmeren | Zendy

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

Author(s) -

Inmoo Lee,

Rex Wang Renjie,

Patrick Verwijmeren

Publication year - 2022

Publication title -

review of finance

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.933

H-Index - 61

eISSN - 1875-824X

pISSN - 1572-3097

DOI - 10.1093/rof/rfac001

Subject(s) - convertible bond , issuer , convertible arbitrage , convertible , business , embedded option , valuation of options , value (mathematics) , stock (firearms) , bond , financial economics , economics , finance , capital asset pricing model , computer science , arbitrage pricing theory , structural engineering , machine learning , risk arbitrage , engineering , mechanical engineering

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.

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