Download or read book Capital Structure Effects on Prices of Firm Stock Options written by Robert L. Geske and published by . This book was released on 2009 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper introduces a new methodology for measuring and analyzing capital structure effects on option prices of individual firms in the economy. By focusing on individual firms we examine the cross sectional effects of leverage on option prices. Our methodology allows the market value of each firm's debt to be implied directly from two contemporaneous, liquid, at-the-money option prices without the use of any historical price data. We compare Geske's parsimonious model to the alternative models of Black Scholes (BS) (1973), Bakshi, Cao, and Chen (BCC, 1997) (stochastic volatility (SV), stochastic volatility and stochastic interest rates (SVSI), and stochastic volatility and jumps (SVJ)), and Pan (2002) (no-risk premia (SV0), volatility-risk premia(SV), jump-risk premia (SVJ0), volatility and jump risk premia (SVJ)) which allows state-dependent jump intensity and adopts implied state-GMM econometrics. These alternative models do not directly incorporate leverage effects into option pricing, and except for Black-Scholes these model calibrations require the use of historical prices, and many more parameters which require complex estimation procedures. The comparison demonstrates that firm leverage has significant statistical and economic cross sectional effects on the prices of individual stock options. The paper confirms that by incorporating capital structure effects using our methodology to imply the market value of each firm's debt, Geske's model reduces the errors pricing options on individual firms by 60% on average, relative to the models compared herein (BS, BCC, Pan) which omit leverage as a variable. However, we would be remiss in not noting that after including leverage there is still room for improvement, and perhaps by also incorporating jumps or stochastic volatility at the firm level would result in an even better model.

Download or read book Capital Structure Effects on the Prices of Individual Equity Call Options written by Robert L. Geske and published by . This book was released on 2015 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 errors by 20% on average, and pricing improvements monotonically increase up to 70% with both leverage and expiration. We show that the CO model implies a market value of firm leverage and allows imputation of the firm's implied volatility, both of which have potential applications in corporate finance.

Download or read book Credit Risk Capital Structure and the Pricing of Equity Options written by Michael Hanke and published by Springer. This book was released on 2003-04-11 with total page 212 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book is on option pricing in firm-value-based ("structural”) credit risk models. Using modern techniques (change of numeraire) instead of directly solving partial differential equations (the main approach in the literature), closed-form pricing formulae for options on equity can be derived for a range of well-known models from this class. A common feature of these models is the assumption of an exogenously given firm value process, which leads to an endogenous equity (stock) price process. The stock price process depends directly on the firm’s capital structure. This allows us not only to study credit risk effects in option prices, but also to investigate option price changes resulting from changes in a firm’s capital structure. Numerical results illustrate the implications of our models. Numerous figures and tables allow for an easy comparison of various structural credit risk models.

Download or read book Corporate Payout Policy written by Harry DeAngelo and published by Now Publishers Inc. This book was released on 2009 with total page 215 pages. Available in PDF, EPUB and Kindle. Book excerpt: Corporate Payout Policy synthesizes the academic research on payout policy and explains "how much, when, and how". That is (i) the overall value of payouts over the life of the enterprise, (ii) the time profile of a firm's payouts across periods, and (iii) the form of those payouts. The authors conclude that today's theory does a good job of explaining the general features of corporate payout policies, but some important gaps remain. So while our emphasis is to clarify "what we know" about payout policy, the authors also identify a number of interesting unresolved questions for future research. Corporate Payout Policy discusses potential influences on corporate payout policy including managerial use of payouts to signal future earnings to outside investors, individuals' behavioral biases that lead to sentiment-based demands for distributions, the desire of large block stockholders to maintain corporate control, and personal tax incentives to defer payouts. The authors highlight four important "carry-away" points: the literature's focus on whether repurchases will (or should) drive out dividends is misplaced because it implicitly assumes that a single payout vehicle is optimal; extant empirical evidence is strongly incompatible with the notion that the primary purpose of dividends is to signal managers' views of future earnings to outside investors; over-confidence on the part of managers is potentially a first-order determinant of payout policy because it induces them to over-retain resources to invest in dubious projects and so behavioral biases may, in fact, turn out to be more important than agency costs in explaining why investors pressure firms to accelerate payouts; the influence of controlling stockholders on payout policy --- particularly in non-U.S. firms, where controlling stockholders are common --- is a promising area for future research. Corporate Payout Policy is required reading for both researchers and practitioners interested in understanding this central topic in corporate finance and governance.

Download or read book The Impact of Options Listing and Trading on the Cost of Debt Capital written by Mehdi khedmati and published by . This book was released on 2015 with total page 478 pages. Available in PDF, EPUB and Kindle. Book excerpt: The existing literature on options listing and trading volume has focused on the benefits of trading in options to shareholders only, arguing that stock options listing and subsequent trading volume improve the informational environment of equity market. While debt capital is a major part of firms' capital structure, the cost of debt capital implications of options listing and trading volume has been overlooked in the literature. Again, the extant literature shows that much of the benefits that shareholders might receive from options listing and trading volume stems from the informational advantage arising from increased trading by informed investors who possess private information in optioned firms compared to firms without listed options and increased activities of information intermediaries. This informational advantage should also benefit the lenders of the firms because options listing and trading volume facilitate access to more and higher quality information and also increase stock liquidity. Therefore, informational advantage of optioned firms should allow lenders to better assess the risk of default and facilitate more effective monitoring of debt agreements, which in return, lowers the rates of returns demanded by the lenders. Further, this informational advantage of options listing and options trading may be far more beneficial to lenders of young firms than old firms because young firms have shorter credit history in the market, thus, exposing their lenders to higher information asymmetry costs. This suggests that lenders could consider the age of borrowing firms as a risk factor when reacting to the informational advantages from options trading and deciding on the rate of return they demand on their lending. To empirically examine the above conjectures, I use three proxies of cost of debt capital comprising credit rating, interest rate on debt, and offering yield spread on new bond issues. My thesis documents the following main findings. First, the results show that all the three proxies used for cost of debt capital are negatively and statistically significantly associated with options listing. Second, the results from further tests on a restricted sample of firm-year observations with listed options show that all three proxies of cost of debt capital are negatively and statistically significantly associated with options trading volume. Third, the results of the analysis based on credit rating and interest rate proxies of cost of debt capital show that the reducing effect of options listing on the cost of debt capital gradually subsides over time, as firms accumulate a credit history in the capital market. Finally, the results of the analysis based on a restricted sample of firm-year observations with listed options and all three proxies of cost of debt capital show that that the reducing effect of options trading volume on the cost of debt capital gradually diminishes over time. The above results remain robust in most of the additional and robustness tests. My thesis contributes to the stream of literature that examines the effect of options listing and trading volume on the cost of capital by providing empirical evidence on the decreasing effect of options listing and options trading volume on the cost of debt capital. It also contributes to the extant literature on the determinants of the cost of debt capital by documenting that increased information quality stemming from options listing and trading volume is priced by lenders, i.e., they demand lower rate of return. Also, my thesis improves our understanding of the moderating influence of firm's age on the ex ante effect of information asymmetry and quality, proxied by options listing and trading volume, on the cost of debt capital. The findings of this thesis would inform firm managers that they may be able to access cheaper debt if they can influence options exchanges to select their firm for options listing, and also would be insightful for options exchanges so as to understand the critical implications their selection decisions may have in terms of influencing the firms' cost of debt capital.

Download or read book The Effects of Options Trading on the Capital Structure Determinants of the Firm written by William K. Dozier and published by . This book was released on 1996 with total page 200 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Firm Performance Capital Structure and the Tax Benefits of Employee Stock Options written by Kathleen M. Kahle and published by . This book was released on 2006 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the relation between the capital structure of a firm and the tax benefits realized from the exercise of stock options. Theory suggests that firms with tax benefits from the exercise of stock options should carry less debt since tax benefits are a non-debt tax shield. We find that both long- and short-term debt ratios are negatively related to the size of tax benefits from option exercise. Moreover, one-year changes in long-term leverage are negatively related to changes in the number of options exercised. Such a relation does not exist for changes in short-term leverage. Finally, firms with option-related tax benefits tend to issue equity, with the net amount of equity issued an increasing function of these tax benefits.

Download or read book THE IMPACT OF CAPITAL STRUCTURE ON FIRM S STOCK PRICES WITH FIRM PERFORMANCE AS MEDIATOR written by CHONG SHIEN YEE (TP042427) and published by . This book was released on 2017 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The Effects of Complex Capital Structure on the Market Values of Firms written by Thomas J. Frecka and published by . This book was released on 1979 with total page 66 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Financing Decisions when Managers are Risk Averse written by Katharina Lewellen and published by . This book was released on 2003 with total page 66 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the impact of financing decisions onrisk-averse managers. Leverage raises stock volatility, driving a wedge between the cost of debt to shareholders and the cost to undiversified, risk-averse managers. I quantify these "volatility costs" of debt and examine their impact on financing decisions. The paper finds: (1) the volatility costs of debt can be large, particularly if the CEO owns in-the-money options; (2) higher option ownership tends to increase, not decrease, the volatility costs of debt; (3) a stock price increase typically reduces managerial preference for leverage, consistent with prior evidence on security issues. Empirically, I estimate the volatility costs of debt for a large sample of U.S. firms and test whether these costs affect financing decisions. I find evidence that volatility costs affect both the level of and short-term changes in debt. Further, a profit model of security issues suggests that managerial preferences help explain a firm's choice between debt and equity. Keywords: Executive Compensation, Stock Options, Risk Incentives, Leverage. JEL Classifications: G3, G32, M52.

Download or read book A Statistical Analysis of the Effect of Capital Structure and Growth on Earnings and Prices of Common Stocks written by Mohamed Fathi Mohamed Ali and published by . This book was released on 1963 with total page 488 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Corporate Capital Structures in the United States written by Benjamin M. Friedman and published by University of Chicago Press. This book was released on 2009-05-15 with total page 404 pages. Available in PDF, EPUB and Kindle. Book excerpt: The research reported in this volume represents the second stage of a wide-ranging National Bureau of Economic Research effort to investigate "The Changing Role of Debt and Equity in Financing U.S. Capital Formation." The first group of studies sponsored under this project, which have been published individually and summarized in a 1982 volume bearing the same title (Friedman 1982), addressed several key issues relevant to corporate sector behavior along with such other aspects of the evolving financial underpinnings of U.S. capital formation as household saving incentives, international capital flows, and government debt management. In the project's second series of studies, presented at the National Bureau of Economic Research conference in January 1983 and published here for the first time along with commentaries from that conference, the central focus is the financial side of capital formation undertaken by the U.S. corporate business sector. At the same time, because corporations' securities must be held, a parallel focus is on the behavior of the markets that price these claims.

Download or read book The Dark Side of Valuation written by Aswath Damodaran and published by FT Press. This book was released on 2009-06-19 with total page 604 pages. Available in PDF, EPUB and Kindle. Book excerpt: Renowned valuation expert Aswath Damodaran reviews the core tools of valuation, examines today’s most difficult estimation questions and issues, and then systematically addresses the valuation challenges that arise throughout a firm’s lifecycle in The Dark Side of Valuation: Valuing Young, Distressed and Complex Businesses. In this thoroughly revised edition, he broadens his perspective to consider all companies that resist easy valuation, highlighting specific types of hard-to-value firms, including commodity firms, cyclical companies, financial services firms, organizations dependent on intangible assets, and global firms operating diverse businesses. He covers the entire corporate lifecycle, from “idea” and “nascent growth” companies to those in decline and distress, and offers specific guidance for valuing technology, human capital, commodity, and cyclical firms. ·

Download or read book A Game Theory Analysis of Options written by Alexandre C. Ziegler and published by Springer Science & Business Media. This book was released on 2012-11-02 with total page 183 pages. Available in PDF, EPUB and Kindle. Book excerpt: Modern option pricing theory was developed in the late sixties and early seventies by F. Black, R. e. Merton and M. Scholes as an analytical tool for pricing and hedging option contracts and over-the-counter warrants. How ever, already in the seminal paper by Black and Scholes, the applicability of the model was regarded as much broader. In the second part of their paper, the authors demonstrated that a levered firm's equity can be regarded as an option on the value of the firm, and thus can be priced by option valuation techniques. A year later, Merton showed how the default risk structure of cor porate bonds can be determined by option pricing techniques. Option pricing models are now used to price virtually the full range of financial instruments and financial guarantees such as deposit insurance and collateral, and to quantify the associated risks. Over the years, option pricing has evolved from a set of specific models to a general analytical framework for analyzing the production process of financial contracts and their function in the financial intermediation process in a continuous time framework. However, very few attempts have been made in the literature to integrate game theory aspects, i. e. strategic financial decisions of the agents, into the continuous time framework. This is the unique contribution of the thesis of Dr. Alexandre Ziegler. Benefiting from the analytical tractability of contin uous time models and the closed form valuation models for derivatives, Dr.

Download or read book Effect of Capital Structure on Future Stock Prices in a Declining Market written by James B. Vetrano and published by . This book was released on 1971 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Impact of Capital Structure on Stock Prices written by Dr. Udayakumari Vidhyasagara Menon and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The study tests the relationship between capital structure and share prices of the listed companies in Muscat Securities Market (MSM). It considers all the 113 listed companies registered in MSM for its three main sectors. The analysis is done by employing correlation analysis, One-way Anova and two way analysis of variance. Further, Brown-Forsythe test and Welch test were also applied to check the robustness of the results to find an inverse relationship between amount of debt and share prices. A positive relationship between amount of equity and share prices and debt equity ratio was also found. The results were statistically significant at 1% level of significance. The results indicate adding debt to overall capital inversely effects the share prices. The results are in tandem to Net Income Approach which portrays capital structure to influence firm value.

Download or read book On Arbitrage Information Costs Compound Options and the Valuation of the Firm and its Assets written by Makram Bellalah and published by . This book was released on 2003 with total page 18 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a simple framework for the valuation of compound options within a context of incomplete information. Information costs are linked to the theory of signaling, agency models and generic stocks in the spirit of Merton's (1987) model of capital market equilibrium with incomplete information. We propose some ideas to explain arbitrage in financial markets in the presence of information costs. The use of these costs is important in the valuation of equity of some firms in the quot;new economyquot; like Internet stocks. Equity in these firms cannot be valued in an appropriate way by a model ignoring information uncertainty. When deriving the compound call option formula, we consider a call option on a stock, which is itself an option on the assets of the firm. Our methodology incorporates shadow costs of incomplete information on the firm's assets as well as the effects of leverage in the capital structure. The compound option formula is derived using two approaches: the standard Black and Scholes approach and the martingale method. The formula can be useful in the valuation of several corporate liabilities in the presence of information uncertainty about the firm and its cash flows. Our analysis can be used for the valuation of several real options.