Myron S. Scholes

Bio: Myron S. Scholes is an academic researcher from Stanford University. The author has contributed to research in topics: Tax reform & Value-added tax. The author has an hindex of 30, co-authored 54 publications receiving 40934 citations. Previous affiliations of Myron S. Scholes include University of Chicago.

The Pricing of Options and Corporate Liabilities

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.

The Capital Asset Pricing Model: Some Empirical Tests

Abstract: Considerable attention has recently been given to general equilibrium models of the pricing of capital assets Of these, perhaps the best known is the mean-variance formulation originally developed by Sharpe (1964) and Treynor (1961), and extended and clarified by Lintner (1965a; 1965b), Mossin (1966), Fama (1968a; 1968b), and Long (1972) In addition Treynor (1965), Sharpe (1966), and Jensen (1968; 1969) have developed portfolio evaluation models which are either based on this asset pricing model or bear a close relation to it In the development of the asset pricing model it is assumed that (1) all investors are single period risk-averse utility of terminal wealth maximizers and can choose among portfolios solely on the basis of mean and variance, (2) there are no taxes or transactions costs, (3) all investors have homogeneous views regarding the parameters of the joint probability distribution of all security returns, and (4) all investors can borrow and lend at a given riskless rate of interest The main result of the model is a statement of the relation between the expected risk premiums on individual assets and their "systematic risk" Our main purpose is to present some additional tests of this asset pricing model which avoid some of the problems of earlier studies and which, we believe, provide additional insights into the nature of the structure of security returns The evidence presented in Section II indicates the expected excess return on an asset is not strictly proportional to its B, and we believe that this evidence, coupled with that given in Section IV, is sufficiently strong to warrant rejection of the traditional form of the model given by (1) We then show in Section III how the cross-sectional tests are subject to measurement error bias, provide a solution to this problem through grouping procedures, and show how cross-sectional methods are relevant to testing the expanded two-factor form of the model We show in Section IV that the mean of the beta factor has had a positive trend over the period 1931-65 and was on the order of 10 to 13% per month in the two sample intervals we examined in the period 1948-65 This seems to have been significantly different from the average risk-free rate and indeed is roughly the same size as the average market return of 13 and 12% per month over the two sample intervals in this period This evidence seems to be sufficiently strong enough to warrant rejection of the traditional form of the model given by (1) In addition, the standard deviation of the beta factor over these two sample intervals was 20 and 22% per month, as compared with the standard deviation of the market factor of 36 and 38% per month Thus the beta factor seems to be an important determinant of security returns

Taxes and Business Strategy: A Planning Approach

Abstract: Chapter 1 Introduction to Tax Strategy Chapter 2 Tax Law Fundamentals Chapter 3 Returns on Alternative Savings Vehicles Chapter 4 Choosing the Optimal Organizational Form Chapter 5 Implicit Taxes and Clienteles, Arbitrage, Restrictions, and Frictions Chapter 6 Nontax Costs of Tax Planning Chapter 7 The Importance of Marginal Tax Rates and Dynamic Tax Planning Considerations Chapter 8 Compensation Planning Chapter 9 Pension and Retirement Planning Chapter 10 Multinational Tax Planning: Introduction and Investment Decisions Chapter 11 Multinational Tax Planning: Foreign Tax Credit Limitations and Income Shifting Chapter 12 Corporations: Formation, Operation, Capital Structure, and Liquidation Chapter 13 Introduction to Mergers, Acquisitions, and Divestitures Chapter 14 Taxable Acquisitions of Freestanding C Corporations Chapter 15 Taxable Acquisitions of S Corporations Chapter 16 Tax-Free Acquisitions of Freestanding C Corporations Chapter 17 Tax Planning for Divestitures Chapter 18 Estate and Gift Tax Planning

The Pricing of Options and Corporate Liabilities

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.

The Cross‐Section of Expected Stock Returns

Abstract: Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market 3, size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in 3 that is unrelated to size, the relation between market /3 and average return is flat, even when 3 is the only explanatory variable. THE ASSET-PRICING MODEL OF Sharpe (1964), Lintner (1965), and Black (1972) has long shaped the way academics and practitioners think about average returns and risk. The central prediction of the model is that the market portfolio of invested wealth is mean-variance efficient in the sense of Markowitz (1959). The efficiency of the market portfolio implies that (a) expected returns on securities are a positive linear function of their market O3s (the slope in the regression of a security's return on the market's return), and (b) market O3s suffice to describe the cross-section of expected returns. There are several empirical contradictions of the Sharpe-Lintner-Black (SLB) model. The most prominent is the size effect of Banz (1981). He finds that market equity, ME (a stock's price times shares outstanding), adds to the explanation of the cross-section of average returns provided by market Os. Average returns on small (low ME) stocks are too high given their f estimates, and average returns on large stocks are too low. Another contradiction of the SLB model is the positive relation between leverage and average return documented by Bhandari (1988). It is plausible that leverage is associated with risk and expected return, but in the SLB model, leverage risk should be captured by market S. Bhandari finds, howev er, that leverage helps explain the cross-section of average stock returns in tests that include size (ME) as well as A. Stattman (1980) and Rosenberg, Reid, and Lanstein (1985) find that average returns on U.S. stocks are positively related to the ratio of a firm's book value of common equity, BE, to its market value, ME. Chan, Hamao, and Lakonishok (1991) find that book-to-market equity, BE/ME, also has a strong role in explaining the cross-section of average returns on Japanese stocks.

On the pricing of corporate debt: the risk structure of interest rates

Abstract: Presented at the American Finance Association Meeting, New York, December 1973.(This abstract was borrowed from another version of this item.)