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Options trading and the cost of debt

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  • Blanco, Iván
  • García, Sergio J.

Abstract

Equity option markets can have a dual effect on firms' cost of debt. On the one hand, options attract more informed investors, which increases price informativeness and reduces information asymmetries in the market, facilitating firm financing. On the other, by attracting more informed investors who provide reassurance regarding managerial career concerns, options can increase the potential for risk shifting in firms. We explore these two channels via different tests on corporate bond yields and use different econometric specifications including quasi-natural experiments to mitigate endogeneity concerns. We find evidence consistent with the preeminence of the risk-shifting channel when private managerial risk-taking incentives are sufficiently high and debtholders are more exposed to expropriation.

Suggested Citation

  • Blanco, Iván & García, Sergio J., 2021. "Options trading and the cost of debt," Journal of Corporate Finance, Elsevier, vol. 69(C).
  • Handle: RePEc:eee:corfin:v:69:y:2021:i:c:s0929119921001267
    DOI: 10.1016/j.jcorpfin.2021.102005
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    Cited by:

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    More about this item

    Keywords

    Options trading; Cost of debt; Price Informativeness; Risk-shifting;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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