Capital Structure, Derivatives and Equity Market Quality

We examine how the existence of individual equity options, publicly traded corporate bonds and credit default swap (CDS) contracts affects equity market quality for a panel of NYSE-listed firms during 2003-2007.

Author(s):

Ekkehart BoehmerLundquist

College of Business, University of Oregonand Affiliate Professor, EDHEC Business School

Sudheer Chava

Georgia Tech University

Heather E. Tookes

Yale School of Management

We find that firms with listed equity options have more liquid equity and more efficient stock prices. By contrast, firms with traded CDS contracts have less liquid equity and less efficient stock prices, especially when these firms or their capital structures are complex (i.e., hard to value). The impact of having a publicly traded bond market is somewhat mixed; however, we observe a signicantly negative role for all trading activity in the related markets (i.e., in both bonds and options) for efficiency and liquidity. Taken together, these results imply an overall negative effect of related markets when those markets are tied to debt in a firm's capital structure.
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Capital Structure, Derivatives and Equity Market Quality...
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Type: Working paper
Date: le 21/10/2010
Extra information : For more information, please contact Joanne Finlay, EDHEC Research and Development Department [ joanne.finlay@edhec.edu ] The contents of this paper do not necessarily reflect the opinions of EDHEC Business School.
Research Cluster : Finance

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