A theoretical and empirical investigation of prime and score: An application of two-state option pricing model
Cheong, M.K.
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https://hdl.handle.net/2142/19416
Description
Title
A theoretical and empirical investigation of prime and score: An application of two-state option pricing model
Author(s)
Cheong, M.K.
Issue Date
1990
Doctoral Committee Chair(s)
Park, Hun Y.
Department of Study
Finance
Discipline
Finance
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Finance
Language
eng
Abstract
Primes and scores are the unbundled stock units which are created by Americus Trusts in 1983. These primes and scores enable shareholders to separate the potential capital appreciation above a stipulated dollar amount from the rights to receive dividends and all other attributes of share ownership. Value additivity theorem suggests that the sum of prime prices and score prices is equal to the stock prices or is less than the stock prices, if any management fee. Primes and scores show the premiums over stock prices consistantly over time, which is inconsistent with the predictions of value additivity theorem. Transaction cost saving hypothesis cannot explain the behaviors of premiums in primes and scores. As an alternative explanation, market incompleteness hypothesis is derived and tested. The empirical results support the market incompleteness hypothesis.
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