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The Option Pricing Model and the Risk Factor of StockDan GalaiHebrew University of Jerusalem - Jerusalem School of Business Administration Ronald W. MasulisUniversity of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN) January/March 1976 Journal of Financial Economics (JFE), Vol. 3, No. 1/2, 1976 Abstract: In this paper a joint capital asset pricing model and option pricing model is considered and applied to the derivation of an equity's value and its systematic risk. We first analyze the propreties of the two models and present some newly found properties of the option pricing model. We then investigate the effects of these properties on firm securityholders with less than perfect "me first" rules. We show how unanticipated changes in firm capital and asset structures can differentially affect a firm's debt and equity. In the final section we consider a number of theoretical and empirical implications of the joint model. These include investment policy as well as the causes and effects of non-stationarity in the systematic risk of levered equity and risky debt.
Number of Pages in PDF File: 29 Keywords: Option pricing, wealth expropriation, nonstationary risk, leverage, investment decisions, financing decisions, conglomerate mergers, mergers, risky debt, levered equity JEL Classification: G13, G12, G31, G32, G34, G33 Accepted Paper SeriesDate posted: October 6, 2009Suggested CitationContact Information
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