Options trading and the cost of debt

Iván Blanco and Sergio J. García

Journal of Corporate Finance, 2021, vol. 69, issue C

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.

Keywords: Options trading; Cost of debt; Price Informativeness; Risk-shifting (search for similar items in EconPapers)
JEL-codes: G30 G31 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:69:y:2021:i:c:s0929119921001267

DOI: 10.1016/j.jcorpfin.2021.102005

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