A Model for Estimating the Cancellation Probabilities of TARP Warrants
Advances in Accounting Finance and Economics, Vol. 3, No. 1, pp. 1-15, 2010
20 Pages Posted: 4 Jun 2009 Last revised: 15 Apr 2012
Date Written: December 31, 2009
Under the Capital Purchase Program (CPP), U.S. taxpayers hold warrants issued by over 270 publicly traded banks. The provisions of the CPP allow for half of the warrants to be cancelled if the recipient bank issues enough preferred or common stock by the end of 2009. This paper develops a model to estimate the probability of a qualified equity issuance that is consistent with standard option pricing techniques. The model is based on the transaction costs of issuing new equity and can be solved numerically.
Keywords: bailout, banks, banking, Capital Purchase Program, Emergency Economic
JEL Classification: G01, G13, G21, G28, G32, G38
Suggested Citation: Suggested Citation