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.

ABSTRACT We examine how the prospect of research and development (R&D) disclosure affects a firm’s institutional investor base. Difference-in-differences (DiD) regressions around the enactment of the American Inventors Protection Act (AIPA), which mandated the public disclosure of patent applications within 18 months of filing, show that short-term institutional investors increase their holdings before public information is released, whereas long-term investors do not adjust their positions. This anticipatory shift is consistent with theoretical predictions that expected disclosure strengthens short-horizon investors’ incentives to acquire and trade on private information. We further document that stock prices reflect more firm-specific information leading up to disclosure and that improved liquidity at disclosure enables short-term investors to partially unwind their positions. Our paper offers novel evidence on how increases in the expected likelihood of disclosure shape investor behavior and the composition of firms’ investor bases.