A Barrier Synthetic Calls' Approach to a Stock and Equity's Valuation when Stockholders Refer to a Heterogeneous Valuation's Framework

Abstract:     
This paper is an attempt to refine the "representative investor" when stockholders vary in their valuation's framework and behave differently when they face selling opportunities. We use option theory and strategic interactions between agents to explain such differences. This leads to a formal link between a firm's share ownership structure and equity's valuation. We suggest that market capitalisation can be replaced by the value of a portfolio of synthetic calls with an up and in barrier. While the pricing of this portfolio is not resolved in this paper, our results and conclusions are helpful to revisit three main themes: the value and weight of equity in the calculation of the cost of capital, the origin of a liquidity risk premium (between comparable listed or listed and non-listed stocks), and the premium paid for a firm's acquisition.

Number of Pages in PDF File: 18

Keywords: equity valuation, synthetic call, barrier synthetic call's approach

JEL Classification: G32,G31

working papers series