Stockholder-Bondholder Conflict: Application of Binomial Option Pricing Methodology

Journal of Applied Finance, Vol. 11, 2001

Posted: 3 Nov 2001

See all articles by C.R. Narayanaswamy

C.R. Narayanaswamy

Clayton State University - Department of Finance & Economics

David Schirm

John Carroll University - Boler School of Business

Ravi Shukla

Syracuse University - Whitman School of Management

Abstract

This paper discusses how the stockholder-bondholder conflict can be analyzed using the binomial option pricing model. Although the potential conflicts between stockholders and bondholders are recognized and discussed in most intermediate corporate finance textbooks, these textbooks, generally do not illustrate the valuation of the relevant options involved in those situations; this article fills that void. Further, it takes explicit account of financial distress of the firm - which is usually the cause of the conflict - in analyzing the underinvestment and asset substitution problems.

JEL Classification: A20, G31

Suggested Citation

Narayanaswamy, Canchepuram Raghunathan and Schirm, David C. and Shukla, Ravi K., Stockholder-Bondholder Conflict: Application of Binomial Option Pricing Methodology. Journal of Applied Finance, Vol. 11, 2001. Available at SSRN: https://ssrn.com/abstract=285549

Canchepuram Raghunathan Narayanaswamy (Contact Author)

Clayton State University - Department of Finance & Economics ( email )

Morrow, GA 30260
United States

David C. Schirm

John Carroll University - Boler School of Business ( email )

University Heights, OH 44118-4581
United States

Ravi K. Shukla

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244-2130
United States
315-443-3576 (Phone)

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