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On buybacks, dilutions, dividends, and the pricing of stock‐based claims

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  • Alex Backwell
  • Thomas A. McWalter
  • Peter H. Ritchken

Abstract

We develop a structural model of the firm that accounts for dilutions, resulting from interest payment shortfalls, and allows cash surpluses to be distributed under a payout policy that permits a combination of dividends and buybacks. Since the model tracks the number of outstanding shares, it can distinguish between claims dependent on the price of a share versus claims that depend on total equity. With a further extension of the model to incorporate employee stock grants, we demonstrate how the prices of traded stock options and employee grants are affected by payout policy. The impact of both dilutions and buybacks on traded option prices and employee grants is shown to be material. This magnitude is further illustrated through a case study involving five technology firms.

Suggested Citation

  • Alex Backwell & Thomas A. McWalter & Peter H. Ritchken, 2022. "On buybacks, dilutions, dividends, and the pricing of stock‐based claims," Mathematical Finance, Wiley Blackwell, vol. 32(1), pages 273-308, January.
    • Handle: RePEc:bla:mathfi:v:32:y:2022:i:1:p:273-308
    DOI: 10.1111/mafi.12332
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    1. Minh-Quan Nguyen & Nhat-Tan Le & Khuong Nguyen-An & Duc-Thi Luu, 2024. "An Integral Equation Approach for the Valuation of Finite-maturity margin-call Stock Loans," Papers 2407.14728, arXiv.org.
    2. McWalter, Thomas A. & Ritchken, Peter H., 2022. "On stock-based loans," Journal of Financial Intermediation, Elsevier, vol. 52(C).

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