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We examine how the existence of individual equity options, publicly traded
corporate bonds and credit default swap (CDS) contracts a ect equity market
quality for a panel of NYSE listed rms during 2003-2007. We nd that rms
with listed equity options have more liquid equity and more effcient stock prices.
By contrast, rms with traded CDS contracts have less liquid equity and less
effcient stock prices, especially when these rms 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 signi cantly negative role for
all trading activity in the related markets (i.e., in both bonds and options) for
effciency and liquidity. Taken together, these results imply an overall negative
e ect of related markets when those markets are tied to debt in a rm's capital
structure.
Download the paper here:
http://www.erim.eur.nl/ERIM/events/C_Events/2%20boehmer%2011.pdf
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