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Dilution and Dividend Effects on the Portuguese Equity Warrants Market

Listed author(s):
  • José Eduardo Correia


    (CEFAGE - UE, Management Department, Évora University, Portugal)

  • João Duque

    (Advance Research Center, School of Economics and Management (ISEG) - Technical University of Lisbon, Portugal)

The aim of this study is to analyse the impact of dilution and dividends on the goodness of fit of warrant pricing valuation models, to the Portuguese warrants market. In order to avoid modelling bias over the research design, and to test dividend and dilution effects we decided to keep this empirical research under the Black-Scholes framework. Therefore, four pricing models were used: the original Black-Scholes model and three derivations. Using these four models we empirically estimate values for actual warrant prices, computing the mean percentage error for each (the difference between model prices and market prices). We found that the original Black-Scholes model when adjusted to account for dilution as well as for dividends works best in the Portuguese market. The analysis uses data collected from the Euronext - Lisbon, between 1998 and 2000.

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Article provided by ISEG, Universidade de Lisboa in its journal Portuguese Journal of Management Studies.

Volume (Year): XIII (2008)
Issue (Month): 2 ()
Pages: 161-192

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Handle: RePEc:pjm:journl:v:xiii:y:2008:i:2:p:161-192
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  1. Emanuel, David C., 1983. "Warrant valuation and exercise strategy," Journal of Financial Economics, Elsevier, vol. 12(2), pages 211-235, August.
  2. Shastri, Kuldeep & Sirodom, Kulpatra, 1995. "An empirical test of the BS and CSR valuation models for warrants listed in Thailand," Pacific-Basin Finance Journal, Elsevier, vol. 3(4), pages 465-483, December.
  3. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters,in: Theory Of Valuation, chapter 8, pages 229-288 World Scientific Publishing Co. Pte. Ltd..
  4. Galai, Dan & Schneller, Meir I, 1978. "Pricing of Warrants and the Value of the Firm," Journal of Finance, American Finance Association, vol. 33(5), pages 1333-1342, December.
  5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
  6. Bierman, Harold, 1973. "The Cost of Warrants," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 8(03), pages 499-503, June.
  7. Whaley, Robert E., 1981. "On the valuation of American call options on stocks with known dividends," Journal of Financial Economics, Elsevier, vol. 9(2), pages 207-211, June.
  8. Geske, Robert, 1981. "Comments on Whaley's note," Journal of Financial Economics, Elsevier, vol. 9(2), pages 213-215, June.
  9. Lauterbach, Beni & Schultz, Paul, 1990. " Pricing Warrants: An Empirical Study of the Black-Scholes Model and Its Alternatives," Journal of Finance, American Finance Association, vol. 45(4), pages 1181-1209, September.
  10. Constantinides, George M., 1984. "Warrant exercise and bond conversion in competitive markets," Journal of Financial Economics, Elsevier, vol. 13(3), pages 371-397, September.
  11. Huang, Yu Chuan & Chen, Shing Chun, 2002. "Warrants pricing: Stochastic volatility vs. Black-Scholes," Pacific-Basin Finance Journal, Elsevier, vol. 10(4), pages 393-409, September.
  12. Wei, Jason Z, 1995. "Empirical Tests of the Pricing of Nikkei Put Warrants," The Financial Review, Eastern Finance Association, vol. 30(2), pages 211-241, May.
  13. Geske, Robert, 1979. "A note on an analytical valuation formula for unprotected American call options on stocks with known dividends," Journal of Financial Economics, Elsevier, vol. 7(4), pages 375-380, December.
  14. Andrey D. Ukhov, 2004. "Warrant Pricing Using Observable Variables," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(3), pages 329-339.
  15. Leonard, David C & Solt, Michael E, 1990. "On Using the Black-Scholes Model to Value Warrants," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 13(2), pages 81-92, Summer.
  16. Spatt, Chester S & Sterbenz, Frederic P, 1988. " Warrant Exercise, Dividends, and Reinvestment Policy," Journal of Finance, American Finance Association, vol. 43(2), pages 493-506, June.
  17. Schulz, G. Uwe & Trautmann, Siegfried, 1994. "Robustness of option-like warrant valuation," Journal of Banking & Finance, Elsevier, vol. 18(5), pages 841-859, October.
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