Cited by 29,074Stochastic processes and financial applicationsCorporate Finance and GovernanceFinancial Reporting and Valuation Research

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The Pricing of Options and Corporate Liabilities

Black, Fischer, Scholes, Myron·1973·Journal of Political Economy

DOI 10.1086/260062

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Abstract

If options are correctly priced in the market, it should not be possible to make sure profits by creating portfolios of long and short positions in options and their underlying stocks. Using this principle, a theoretical valuation formula for options is derived. Since almost all corporate liabilities can be viewed as combinations of options, the formula and the analysis that led to it are also applicable to corporate liabilities such as common stock, corporate bonds, and warrants. In particular, the formula can be used to derive the discount that should be applied to a corporate bond because of the possibility of default.

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CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*
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THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]
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Authors: Black, F., & Scholes, M.
Venue: Journal of Political Economy
Publisher: University of Chicago Press
Published: 1973-05
Volume: 81
Issue: 3
Pages: 637-654
ISSN: 0022-3808 (ISSN-L)
1537-534X
DOI: 10.1086/260062
OpenAlex: W2077791698
Cited by: 29,074
References: 16
Citations by year: 2026: 616 · 2025: 918 · 2024: 879 · 2023: 844 · 2022: 836 · 2021: 1015 · 2020: 1006 · 2019: 1099 · 2018: 1045 · 2017: 1068 · 2016: 1175 · 2015: 1174 · 2014: 1340 · 2013: 1260 · 2012: 1372
FWCI: 66.59
Type: journal article
Language: en
Open access: closed
Locations: Journal of Political Economy (publishedVersion)
Topics: Social Sciences › Economics, Econometrics and Finance › Finance › Stochastic processes and financial applications
Social Sciences › Economics, Econometrics and Finance › Finance › Corporate Finance and Governance
Social Sciences › Business, Management and Accounting › Strategy and Management › Financial Reporting and Valuation Research
Keywords: option pricing, corporate liability, arbitrage, portfolio hedging, warrants, corporate bonds, default risk, common stock, real options

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The Pricing of Options and Corporate Liabilities

Abstract

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Integrity signals

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