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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Options, Equity Risks, and the Value of Capital Structure Adjustments
We use exchange-traded options to identify risks relevant to capital structure adjustments in firms. These forward-looking market-based risk measures provide significant explanatory power in predicting net leverage changes in excess of accounting data. They matter most during contractionary periods and for growth firms. We form market-based indices that capture firms' magnitudes of, and propensity for, net leverage increases. Firms with larger predicted leverage increases outperform firms with lower predicted increases by 3.1% to 3.9% per year in buy-and-hold abnormal returns. Finally, consistent with the quality, leverage, and distress risk puzzles, firms with lower predicted leverage increases are riskier but earn lower abnormal returns.
Cite this item
Paul Borochin & Jie Yang, Options, Equity Risks, and the Value of Capital Structure Adjustments, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2016-097, Oct 2016.
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
Keywords: Capital Structure ; Financial Leverage ; Options ; Implied Volatility
This item with handle RePEc:fip:fedgfe:2016-97
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