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Optimal liquidation policies of redeemable shares

Author

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  • Anna Battauz

    (Baffi and IGIER, Bocconi University Milan)

  • Francesco Rotondi

    (Bocconi University)

Abstract

In this paper we explore the optimal issuance and liquidation of redeemable shares. Redeemable shares are those that the issuer can repurchase, or redeem, at a predetermined price, known as the call price, as soon as a given barrier event is triggered. We first determine the optimal call price for the issuer by stating and solving a stylized earning per share maximization problem from the point of view of a company. Once the call price is determined, we focus on the valuation of both perpetual and finite-maturity redeemable shares and we examine the problem of their optimal liquidation from the point of view of a shareholder holding them. Along with the few closed-form results that can be obtained in a lognormal continuous-time framework, we propose an intuitive and flexible method to retrieve the optimal liquidation policy in the form of a liquidation boundary, thanks to a parsimonious Markovianization of the evaluation problem in a binomial framework. Numerical tests using alternative market models and different dividend formulations confirm the robustness of our results.

Suggested Citation

  • Anna Battauz & Francesco Rotondi, 2024. "Optimal liquidation policies of redeemable shares," Computational Management Science, Springer, vol. 21(2), pages 1-32, December.
    • Handle: RePEc:spr:comgts:v:21:y:2024:i:2:d:10.1007_s10287-024-00526-x
    DOI: 10.1007/s10287-024-00526-x
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    References listed on IDEAS

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