Purpose – Scholars have examined the importance of a firm's dividend policy through two competing paradigms: the signalling hypothesis and the free cash-flow hypothesis. It has been argued that our understanding of dividend policy is hindered by the lack of a model that integrates the two...

Purpose – The purpose of this paper is to extend the models of Johnson and Stulz, Klein and Klein and lnglis to analyse the properties of vulnerable American options. Design/methodology/approach – The presented model allows default prior to the maturity of the option based on a barrier which...