Most of the recent literature on risk management and capital structure assumes that markets are perfect, i.e., efficient and complete. This paper presents anecdotal evidence that suggests that different capital markets (e.g., debt, equity and warrants markets) may not be perfectly integrated,...

We examine whether values of equity options traded on individual firms are sensitive to the firm's capital structure. Specifically, we estimate the compound option (CO) model, which views equity as an option on the firm. Compared to the Black-Scholes (BS) model, the CO model reduces pricing...