Stock index-linked debt and shareholder value

Abstract

French banks and non-financial companies issue index-linked debt whose value at maturity is indexed to the CAC 40 or to a basket of European indices. This paper examines stock announcement effects associated with these bonds on three dates: the date the issuer’s General Assembly decides future capital needs, the publication in the journal of the COB (the stock market board), and the issue date. We find the issuance of index-linked debt has significant positive announcement effects on the issue date, which we attribute to its market-completion property. In order to examine further whether market completion is at play, we decompose the value of the bond at issue into its straight bond and option values. We determine that the bonds are overvalued again supporting market completion.