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The Valuation of Stock Purchase Rights as Call Options

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  • Bae, Sung C
  • Levy, Haim

Abstract

The predictability of rights valuation models is tested, viewing the rights as call options. The results show that rights valuation models, on average, overprice the rights. The bias in the model prices of rights found in this paper is opposite to that predicted by Merton. Among several factors considered, possible volatility changes associated with raising capital through a rights offering account for some of the observed pricing deviation. A further regression analysis shows that while the pricing deviation is positively related to both the degree that the rights are in the money and the allocation ratio, it is negatively related to the time to expiration and the daily trading volume of the rights. Copyright 1994 by MIT Press.

Suggested Citation

  • Bae, Sung C & Levy, Haim, 1994. "The Valuation of Stock Purchase Rights as Call Options," The Financial Review, Eastern Finance Association, vol. 29(3), pages 419-440, August.
    • Handle: RePEc:bla:finrev:v:29:y:1994:i:3:p:419-40
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    Cited by:

    1. Mohd Edil Abd Sukor & Obiyathulla Ismath Bacha, 2010. "Pricing efficiency of stock rights issues in Malaysia," Applied Financial Economics, Taylor & Francis Journals, vol. 20(22), pages 1751-1760.
    2. Klaus Röder & Gregor Dorfleitner, 2002. "Der Optionscharakter von Bezugsrechten," Schmalenbach Journal of Business Research, Springer, vol. 54(5), pages 460-477, August.
    3. Poitras, Geoffrey, 2002. "Short sales restrictions, dilution and the pricing of rights issues on the Singapore Stock Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 10(2), pages 141-162, April.
    4. Hung T. Chu & Graham Partington, 2001. "Dangers in data adjustment: the case of rights issues and returns," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 41(3), pages 143-168, November.

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