Working Papers

The Hidden Cost of Financial Derivatives: Options Trading and the Cost of Debt 

(with Iván Blanco).

Full paper here.

We investigate the extent to which firms' cost of debt may be affected by the presence of an active options market for the stock. Our baseline results reveal a detrimental effect of options trading volume on bond yield spreads and bond credit ratings. Specifically, a one-standard-deviation increase in options trading volume from its mean is associated with a 10-basis-point increase in the bond at-issue yield spread. We discuss the potential underlying mechanisms and provide suggestive evidence of this effect via the exacerbation of shareholder-bondholder conflicts. Finally, using several econometric specifications and instrumental variables analysis, we argue that the nature of the effect is causal.

KEYWORDS: cost of debt, options trading, expropriation risk,firm default, takeover vulnerability.


JEL codes: G12, G23, G24, G31, G33.


The Role of Option Markets in Shareholder Activism 

First version here.

I investigate whether financial derivative contracts such options promote or impede shareholder activism. Baseline results reveal a positive association between more liquid option markets and subsequent shareholder activism in the forms of proxy contests, shareholders proposals, or dissent voting with management. I discuss potential underlying mechanisms that channel the effect, and overall suggest that options encourage shareholder activism by facilitating the profitability of an intervention, except in the case of highly overvalued firms. Finally, using several econometric specifications and instrumental variable analysis, I claim the nature of the effect is causal.

KEYWORDS: shareholder activism, options trading, shareholder proposal, Institutional Shareholder Services (ISS).


JEL codes: G12, G23, G30.


Looking for Transparency: Institutional Ownership and Innovation Disclosure.

(with Iván Blanco and David Wehrheim).

First version here.

We exploit the passage of the American Investor Protection Act of 1999 (AIPA) as an exogenous shock to the informational environment of the firm and investigate institutional investors' preferences for information and firm disclosure. We find that more innovation disclosure causes an increase in firm-level institutional ownership of around 11%. This increase is mostly concentrated in institutions that actively trade on information (dedicated, quasi-indexers, short-term owners). By benefiting these institutions, innovation disclosure seems to enlarge the adverse selection gap between informed and uninformed market participants. Finally, we provide evidence suggesting a substitution effect between the degree of information disclosure to shareholders and the power they demand inside the corporation.

KEYWORDS: Institutional Ownership, Information Disclosure, American Inventors Protection Act, Adverse Selection.


JEL codes: G14, G20, G30, G32.

Work in Progress

Investor over-confidence and skin in the game 

(with Iván Blanco and David Wehrheim).

Size matters: The case of merger arbitrage hedge funds