| In the 1990s various firms began to issue put warrants on their own stock, ostensibly as part of their stock repurchase programs. Sales of put warrants are significant. For example, Microsoft received proceeds of {dollar}538 million, {dollar}766 million and {dollar}472 million in fiscal years 1998, 1999 and 2000, respectively. The purpose of my dissertation is to (a) investigate why and how firms issue put warrants, (b) examine how put warrants are valued, (c) explore the economic and regulatory implications of the practice of issuing put warrants.; Chapter 1 is introduction. Chapter 2 surveys the actual experience of a variety of firms during the past 12 years. Having identified some of the common features of firms that have issued puts, we describe the types of put warrants they issued, explain how they used the proceeds from the sales, and document the profits that were made and the losses incurred. Also explored are the regulatory and accounting issues pertaining to the issuance of put warrants. Chapter 3 presents the theory of how put warrants are valued in arbitrage-free markets and how the practice affects the volatility and value of the common stock, the values of ordinary put and call options, and the values of stock options issued to managers and key employees. We show that put warrants and ordinary put options must be priced differently, as sales of put warrants are private transactions and the firm's default risk is not zero. Chapter 4 explores the numerous perverse incentives that managers face when firms issue puts on their own stock and highlights issues relevant for regulatory policy. |
