IDEAS home Printed from https://ideas.repec.org/a/eee/finmar/v58y2022ics138641812100029x.html
   My bibliography  Save this article

Options listings and loan contract terms: Information versus risk-shifting

Author

Listed:
  • Do, Viet
  • Truong, Cameron
  • Vu, Tram

Abstract

We find that following options listings, U.S. firms enjoy an average 17 bps interest reduction in new bank loans. These savings are greater among more opaque borrowers, which provides support for the information production channel. This effect is, however, absent when the options market is illiquid or highly active. Consistent with risk-shifting, borrowers with more active options markets pay higher spreads. Post-options loans carry higher spreads than pre-options loans when managers exhibit stronger risk-shifting incentives. Options listings lead to shorter (longer) loan maturities for unrated (investment-grade) borrowers, while the influence on collateral and covenant restrictions is consistent with both channels.

Suggested Citation

  • Do, Viet & Truong, Cameron & Vu, Tram, 2022. "Options listings and loan contract terms: Information versus risk-shifting," Journal of Financial Markets, Elsevier, vol. 58(C).
    • Handle: RePEc:eee:finmar:v:58:y:2022:i:c:s138641812100029x
    DOI: 10.1016/j.finmar.2021.100647
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S138641812100029X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.finmar.2021.100647?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Philippe Aghion & John Van Reenen & Luigi Zingales, 2013. "Innovation and Institutional Ownership," American Economic Review, American Economic Association, vol. 103(1), pages 277-304, February.
    2. Besanko, David & Thakor, Anjan V., 1987. "Competitive equilibrium in the credit market under asymmetric information," Journal of Economic Theory, Elsevier, vol. 42(1), pages 167-182, June.
    3. Gao, Huasheng, 2010. "Optimal compensation contracts when managers can hedge," Journal of Financial Economics, Elsevier, vol. 97(2), pages 218-238, August.
    4. Lawrence Fisher, 1959. "Determinants of Risk Premiums on Corporate Bonds," Journal of Political Economy, University of Chicago Press, vol. 67, pages 217-217.
    5. Demerjian, Peter R. & Owens, Edward L., 2016. "Measuring the probability of financial covenant violation in private debt contracts," Journal of Accounting and Economics, Elsevier, vol. 61(2), pages 433-447.
    6. Hainmueller, Jens, 2012. "Entropy Balancing for Causal Effects: A Multivariate Reweighting Method to Produce Balanced Samples in Observational Studies," Political Analysis, Cambridge University Press, vol. 20(1), pages 25-46, January.
    7. Johnson, Travis L. & So, Eric C., 2012. "The option to stock volume ratio and future returns," Journal of Financial Economics, Elsevier, vol. 106(2), pages 262-286.
    8. Jaffee, Dwight M., 1975. "Cyclical variations in the risk structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 1(3), pages 309-325, July.
    9. Chakraborty, Atreya & Hu, Charles X., 2006. "Lending relationships in line-of-credit and nonline-of-credit loans: Evidence from collateral use in small business," Journal of Financial Intermediation, Elsevier, vol. 15(1), pages 86-107, January.
    10. Jennings, Robert & Starks, Laura, 1986. "Earnings Announcements, Stock Price Adjustment, and the Existence of Option Markets," Journal of Finance, American Finance Association, vol. 41(1), pages 107-125, March.
    11. David Gaddis Ross, 2010. "The "Dominant Bank Effect:" How High Lender Reputation Affects the Information Content and Terms of Bank Loans," Review of Financial Studies, Society for Financial Studies, vol. 23(7), pages 2730-2756, July.
    12. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    13. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-381, July.
    14. Flannery, Mark J, 1986. "Asymmetric Information and Risky Debt Maturity Choice," Journal of Finance, American Finance Association, vol. 41(1), pages 19-37, March.
    15. Amir Sufi, 2007. "Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans," Journal of Finance, American Finance Association, vol. 62(2), pages 629-668, April.
    16. Turan G. Bali & Armen Hovakimian, 2009. "Volatility Spreads and Expected Stock Returns," Management Science, INFORMS, vol. 55(11), pages 1797-1812, November.
    17. Cremers, Martijn & Driessen, Joost & Maenhout, Pascal & Weinbaum, David, 2008. "Individual stock-option prices and credit spreads," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2706-2715, December.
    18. Back, Kerry, 1993. "Asymmetric Information and Options," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 435-472.
    19. Tobias Berg & Anthony Saunders & Sascha Steffen, 2016. "The Total Cost of Corporate Borrowing in the Loan Market: Don't Ignore the Fees," Journal of Finance, American Finance Association, vol. 71(3), pages 1357-1392, June.
    20. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    21. Jeong†Bon Kim & Liandong Zhang, 2016. "Accounting Conservatism and Stock Price Crash Risk: Firm†level Evidence," Contemporary Accounting Research, John Wiley & Sons, vol. 33(1), pages 412-441, March.
    22. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    23. Low, Angie, 2009. "Managerial risk-taking behavior and equity-based compensation," Journal of Financial Economics, Elsevier, vol. 92(3), pages 470-490, June.
    24. Xing, Yuhang & Zhang, Xiaoyan & Zhao, Rui, 2010. "What Does the Individual Option Volatility Smirk Tell Us About Future Equity Returns?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(3), pages 641-662, June.
    25. Dean Diavatopoulos & James S. Doran & David R. Peterson, 2008. "The information content in implied idiosyncratic volatility and the cross‐section of stock returns: Evidence from the option markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 28(11), pages 1013-1039, November.
    26. Amiram, Dan & Beaver, William H. & Landsman, Wayne R. & Zhao, Jianxin, 2017. "The effects of credit default swap trading on information asymmetry in syndicated loans," Journal of Financial Economics, Elsevier, vol. 126(2), pages 364-382.
    27. Anthony Saunders & Sascha Steffen, 2011. "The Costs of Being Private: Evidence from the Loan Market," Review of Financial Studies, Society for Financial Studies, vol. 24(12), pages 4091-4122.
    28. Charles Cao & Zhiwu Chen & John M. Griffin, 2005. "Informational Content of Option Volume Prior to Takeovers," The Journal of Business, University of Chicago Press, vol. 78(3), pages 1073-1109, May.
    29. John Y. Campbell & Glen B. Taksler, 2003. "Equity Volatility and Corporate Bond Yields," Journal of Finance, American Finance Association, vol. 58(6), pages 2321-2350, December.
    30. Manaster, Steven & Rendleman, Richard J, Jr, 1982. "Option Prices as Predictors of Equilibrium Stock Prices," Journal of Finance, American Finance Association, vol. 37(4), pages 1043-1057, September.
    31. Campello, Murillo & Gao, Janet, 2017. "Customer concentration and loan contract terms," Journal of Financial Economics, Elsevier, vol. 123(1), pages 108-136.
    32. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    33. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    34. Nini, Greg & Smith, David C. & Sufi, Amir, 2009. "Creditor control rights and firm investment policy," Journal of Financial Economics, Elsevier, vol. 92(3), pages 400-420, June.
    35. Jianfeng Hu, 2018. "Option Listing and Information Asymmetry," Review of Finance, European Finance Association, vol. 22(3), pages 1153-1194.
    36. Skinner, Douglas J., 1989. "Options markets and stock return volatility," Journal of Financial Economics, Elsevier, vol. 23(1), pages 61-78, June.
    37. Sudheer Chava & Michael R. Roberts, 2008. "How Does Financing Impact Investment? The Role of Debt Covenants," Journal of Finance, American Finance Association, vol. 63(5), pages 2085-2121, October.
    38. Hollander, Stephan & Verriest, Arnt, 2016. "Bridging the gap: the design of bank loan contracts and distance," Journal of Financial Economics, Elsevier, vol. 119(2), pages 399-419.
    39. John Core & Wayne Guay, 2002. "Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 613-630, June.
    40. Ge, Li & Lin, Tse-Chun & Pearson, Neil D., 2016. "Why does the option to stock volume ratio predict stock returns?," Journal of Financial Economics, Elsevier, vol. 120(3), pages 601-622.
    41. Li‐Chin Jennifer Ho & John M. Hassell & Steve Swidler, 1995. "An empirical examination of the dispersion and accuracy of analyst forecasts surrounding option listing," Review of Financial Economics, John Wiley & Sons, vol. 4(2), pages 171-185, March.
    42. Boot, Arnoud W A & Thakor, Anjan V & Udell, Gregory F, 1991. "Secured Lending and Default Risk: Equilibrium Analysis, Policy Implications and Empirical Results," Economic Journal, Royal Economic Society, vol. 101(406), pages 458-472, May.
    43. Hutton, Amy P. & Marcus, Alan J. & Tehranian, Hassan, 2009. "Opaque financial reports, R2, and crash risk," Journal of Financial Economics, Elsevier, vol. 94(1), pages 67-86, October.
    44. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(3), pages 473-494.
    45. Douglas W. Diamond, 1991. "Debt Maturity Structure and Liquidity Risk," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(3), pages 709-737.
    46. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    47. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2006. "Managerial incentives and risk-taking," Journal of Financial Economics, Elsevier, vol. 79(2), pages 431-468, February.
    48. Roll, Richard & Schwartz, Eduardo & Subrahmanyam, Avanidhar, 2010. "O/S: The relative trading activity in options and stock," Journal of Financial Economics, Elsevier, vol. 96(1), pages 1-17, April.
    49. Ivashina, Victoria, 2009. "Asymmetric information effects on loan spreads," Journal of Financial Economics, Elsevier, vol. 92(2), pages 300-319, May.
    50. Kaushik I. Amin & Charles M. C. Lee, 1997. "Option Trading, Price Discovery, and Earnings News Dissemination," Contemporary Accounting Research, John Wiley & Sons, vol. 14(2), pages 153-192, June.
    51. Michael Bradley & Michael R. Roberts, 2015. "The Structure and Pricing of Corporate Debt Covenants," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 5(02), pages 1-37.
    52. Shan, Chenyu & Tang, Dragon Yongjun & Winton, Andrew, 2019. "Do banks still monitor when there is a market for credit protection?," Journal of Accounting and Economics, Elsevier, vol. 68(2).
    53. Dennis, Steven & Nandy, Debarshi & Sharpe, Lan G., 2000. "The Determinants of Contract Terms in Bank Revolving Credit Agreements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(1), pages 87-110, March.
    54. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-855, September.
    55. Berger, Allen N. & Udell, Gregory F., 1990. "Collateral, loan quality and bank risk," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 21-42, January.
    56. Roll, Richard & Schwartz, Eduardo & Subrahmanyam, Avanidhar, 2009. "Options trading activity and firm valuation," Journal of Financial Economics, Elsevier, vol. 94(3), pages 345-360, December.
    57. Blanco, Iván & Wehrheim, David, 2017. "The bright side of financial derivatives: Options trading and firm innovation," Journal of Financial Economics, Elsevier, vol. 125(1), pages 99-119.
    58. Armstrong, Christopher S. & Larcker, David F. & Ormazabal, Gaizka & Taylor, Daniel J., 2013. "The relation between equity incentives and misreporting: The role of risk-taking incentives," Journal of Financial Economics, Elsevier, vol. 109(2), pages 327-350.
    59. Ram T. S. Ramakrishnan & Anjan V. Thakor, 1984. "Information Reliability and a Theory of Financial Intermediation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 415-432.
    60. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
    61. Damodaran, Aswath & Lim, Joseph, 1991. "The effects of option listing on the underlying stocks' return processes," Journal of Banking & Finance, Elsevier, vol. 15(3), pages 647-664, June.
    62. David Easley & Maureen O'hara, 2004. "Information and the Cost of Capital," Journal of Finance, American Finance Association, vol. 59(4), pages 1553-1583, August.
    63. Biais, Bruno & Hillion, Pierre, 1994. "Insider and Liquidity Trading in Stock and Options Markets," Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 743-780.
    64. Shen, Carl Hsin-han & Zhang, Hao, 2013. "CEO risk incentives and firm performance following R&D increases," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1176-1194.
    65. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
    66. Mayhew, Stewart & Sarin, Atulya & Shastri, Kuldeep, 1995. "The Allocation of Informed Trading across Related Markets: An Analysis of the Impact of Changes in Equity-Option Margin Requirements," Journal of Finance, American Finance Association, vol. 50(5), pages 1635-1653, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Roman, Raluca A., 2020. "Winners and losers from supervisory enforcement actions against banks," Journal of Corporate Finance, Elsevier, vol. 60(C).
    2. Da‐Hea Kim, 2022. "Investment horizon and option market activity," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(5), pages 923-958, May.
    3. Pappas, Kostas & Walsh, Eamonn & Xu, Alice Liang, 2019. "Real earnings management and loan contract terms," The British Accounting Review, Elsevier, vol. 51(4), pages 373-401.
    4. Duran, Miguel A., 2022. "The risk–return relation in the corporate loan market," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).
    5. Yongheng Deng & Maggie (Rong) Hu & Anand Srinivasan, 2017. "Information Asymmetry and Organizational Structure: Evidence from REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 55(1), pages 32-64, July.
    6. Botsch, Matthew & Vanasco, Victoria, 2019. "Learning by lending," Journal of Financial Intermediation, Elsevier, vol. 37(C), pages 1-14.
    7. Xu Chong Bo & Wenyi Li & Jing Shi & Yi Zheng & Qing Zhou, 2021. "Relationship lending and bank loan covenant violations," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(4), pages 5847-5878, December.
    8. Allen N. Berger & Tanakorn Makaew & Raluca Roman, 2015. "Did bank borrowers benefit from the TARP program : the effects of TARP on loan contract terms," Research Working Paper RWP 15-11, Federal Reserve Bank of Kansas City.
    9. Kim, Young Sang & Kim, Yura & Yi, Ha-Chin, 2021. "Vice or virtue? The impact of earnings management on bank loan agreements," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 303-324.
    10. Chy, Mahfuz & Kyung, Hoyoun, 2023. "The effect of bond market transparency on bank loan contracting," Journal of Accounting and Economics, Elsevier, vol. 75(2).
    11. Graham, John R. & Li, Si & Qiu, Jiaping, 2008. "Corporate misreporting and bank loan contracting," Journal of Financial Economics, Elsevier, vol. 89(1), pages 44-61, July.
    12. Beyhaghi, Mehdi & Nguyen, Ca & Wald, John K., 2019. "Institutional investors and loan dynamics: Evidence from loan renegotiations," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 482-505.
    13. Brick, Ivan E. & Palia, Darius, 2007. "Evidence of jointness in the terms of relationship lending," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 452-476, July.
    14. He, Zhongda & Qiao, Guannan & Zhang, Le & Zhang, Wenrui, 2021. "Regulator supervisory power and bank loan contracting," Journal of Banking & Finance, Elsevier, vol. 126(C).
    15. Kiyoung Chang & Ying Li & Ha‐Chin Yi, 2021. "Informed equity ownership and bank loan contracting," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(7-8), pages 1368-1403, July.
    16. Isin, Adnan Anil, 2018. "Tax avoidance and cost of debt: The case for loan-specific risk mitigation and public debt financing," Journal of Corporate Finance, Elsevier, vol. 49(C), pages 344-378.
    17. Alejandro Bernales & Thanos Verousis & Nikolaos Voukelatos & Mengyu Zhang, 2020. "What do we know about individual equity options?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(1), pages 67-91, January.
    18. Annie bellier & Wafa Sayeh & Stéphanie Serve, 2012. "What lies behind credit rationing? A survey of the literature," THEMA Working Papers 2012-39, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    19. Blanco, Iván & García, Sergio J., 2021. "Options trading and the cost of debt," Journal of Corporate Finance, Elsevier, vol. 69(C).
    20. Gu, Xiaolong & Xin, Yu & Xu, Liping, 2019. "Expected stock price crash risk and bank loan pricing: Evidence from China's listed firms," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).

    More about this item

    Keywords

    Loan spread; Contract term; Asymmetric information; Options listing; Options trading; Risk shifting;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finmar:v:58:y:2022:i:c:s138641812100029x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/finmar .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.