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Pricing Corporate Securities as Contingent Claims

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  • Kenneth D. Garbade

    () (Federal Reserve Bank of New York)

Abstract

In 1973, Fischer Black, Myron Scholes, and Robert Merton pointed out that securities issued by a corporation can be priced as claims whose values are contingent on the value of the enterprise as a whole. The notion of treating corporate securities as contingent claims is intrinsically important, but it is also important because it integrates a variety of otherwise loosely related topics, including equity risk, credit risk, seniority and subordination, early redemption of callable debt, and conversion of convertible debt. Bringing together developments from the past thirty years in contingent valuation, this book examines the relative value of securities in a corporation's capital structure, including debt of different priorities, convertible debt, common stock, and warrants. The book emphasizes the importance of accounting for the institutional characteristics of default, bankruptcy, and voluntary recapitalization of a financially distressed firm, as well as the exercise of managerial discretion in calling debt for early redemption, servicing debt, paying dividends to common shareholders, and undertaking strategic actions such as leveraged recapitalizations and spin-offs.

Suggested Citation

  • Kenneth D. Garbade, 2001. "Pricing Corporate Securities as Contingent Claims," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262072238, January.
  • Handle: RePEc:mtp:titles:0262072238
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    Cited by:

    1. Ido Kallir & Tamir Agmon, 2015. "Valuating the Value and Risk of International Start-up Ventures," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 6(2), pages 203-217, April.
    2. Samuel Hanson & M. Hashem Pesaran & Til Schuermann, 2005. "Firm Heterogeneity and Credit Risk Diversification," CESifo Working Paper Series 1531, CESifo Group Munich.
    3. Til Schuermann, 2005. "A review of recent books on credit risk," Journal of Applied Econometrics, John Wiley & Sons, Ltd., pages 123-130.
    4. M. Hashem Pesaran & Til Schuermann & Bjorn-Jakob Treutler, 2007. "Global Business Cycles and Credit Risk," NBER Chapters,in: The Risks of Financial Institutions, pages 419-474 National Bureau of Economic Research, Inc.
    5. Hanson, Samuel G. & Pesaran, M. Hashem & Schuermann, Til, 2008. "Firm heterogeneity and credit risk diversification," Journal of Empirical Finance, Elsevier, pages 583-612.
    6. Pethig, Rudiger, 2006. "Non-linear production, abatement, pollution and materials balance reconsidered," Journal of Environmental Economics and Management, Elsevier, pages 185-204.
    7. M. Hashem Pesaran & Til Schuermann & Bjorn-Jakob Treutler, 2007. "Global Business Cycles and Credit Risk," NBER Chapters,in: The Risks of Financial Institutions, pages 419-474 National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    corporate security; leveraged recapitalization; convertible debt; common stock;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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