On Buybacks, Dilutions, Dividends, and the Pricing of Stock-Based Claims

52 Pages Posted: 2 Aug 2019

See all articles by Alex Backwell

Alex Backwell

University of Cape Town

Thomas McWalter

University of Cape Town (UCT); University of Johannesburg

Peter H. Ritchken

Case Western Reserve University - Department of Banking & Finance

Date Written: July 19, 2019

Abstract

We develop a structural model of the firm that allows after-interest cash to be directed to dividends, buybacks or some combination thereof. We study the effects of dilutions and buybacks on the value of the firm's claimants and on options written on the stock. We distinguish between options on equity and options on individual shares and value both types. We examine employee stock options and establish how their value changes in accordance with changing payout policies. Our model allows us to quantify and analyze the wealth transfer that occurs from shareholders to holders of employee stock-based contingent claims.

Keywords: Payout Policy, Option Pricing, Buybacks, Dilution, Employee Incentive Plans, Structural Models of the Firm

JEL Classification: G13, G35

Suggested Citation

Backwell, Alex and McWalter, Thomas and Ritchken, Peter H., On Buybacks, Dilutions, Dividends, and the Pricing of Stock-Based Claims (July 19, 2019). Available at SSRN: https://ssrn.com/abstract=3422692 or http://dx.doi.org/10.2139/ssrn.3422692

Alex Backwell

University of Cape Town ( email )

University of Cape Town
Rondebosch
Cape Town, Western Cape 7700
South Africa

Thomas McWalter (Contact Author)

University of Cape Town (UCT) ( email )

Private Bag X3
Rondebosch, Western Cape 7701
South Africa

University of Johannesburg ( email )

PO Box 524
Auckland Park
Johannesburg, Gauteng 2006
South Africa

Peter H. Ritchken

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States
216-368-3849 (Phone)
216-368-4776 (Fax)

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