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

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