The Option Pricing Model and the Risk Factor of Stock

By D. Galai, Ronald W. Masulis. World Scientific Reference on Contingent Claims Analysis in Corporate Finance, 2019

409 citations recorded by the source corpus.

Abstract In this paper a combined capital asset pricing model and option pricing model is considered and then applied to the derivation of equity's value and its systematic risk. In the first section we develop the two models and present some newly found properties of the option pricing model. The second section is concerned with the effects of these properties on the securityholders of firms with less than perfect ‘me first’ rules. We show how unanticipated changes in firm capital and asset structures can differentially affect the firm's debt and equity. In the final section of the paper we consider a number of theoretical and empirical implications of the joint model. These include investment policy as well as the causes and effects of non-stationarity in the systematic risk of levered equity and risky debt.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/84edaebdffe035ac57083f36321edc60ebafe212

Citations in the corpus

• Corporate Income Taxes, Valuation, and the Problem of Optimal Capital Structure (2019, neutral): “, see Galai and Masulis (1976). 4.”
• How Valuable Is Financial Flexibility when Revenue Stops? Evidence from the COVID-19 Crisis (2020, neutral): “Hamada (1972) and Galai and Masulis (1976) show that, theoretically, firms with more leverage have a higher exposure to market movements when the”
• Social Capital and Debt Contracting: Evidence from Bank Loans and Public Bonds (2017, neutral): “These dealings include overinvestment (Galai and Masulis (1976)), claim dilution (Bebchuk (2002)), and accounting manipulation to avoid covenant violations (DeFond and Jiambalvo (1994)).”