Most options are traded over‐the‐counter (OTC) and are dividend “protected;” the exercise price decreases on the ex date by an amount equal to the dividend. This protection completely inhibits the early exercise of American call options. Nevertheless, OTC‐protected options have market values which differ systematically from Black‐Scholes values for European options on non‐dividend paying stocks. The pricing difference is related to both the variance of the underlying stock return and to time until expiration of the option, but it is quite small in dollar amount.

Robert Geske, Richard Roll, Kuldeep Shastri, Over-the-Counter Option Market Dividend Protection and "Biases" in the Black-Scholes Model: A Note, The Journal of Finance, Vol. 38, No. 4 (Sep., 1983), pp. 1271-1277

This paper examines the valuation impacts of specially designated dividends (SDDs) by analyzing the behavior of stock and bond prices on dates surrounding their announcements. The evidence presented here suggests that SDDs are considered positive signals by the market, with (most of) the gains associated with their announcements accruing to stockholders. In addition, we present some evidence that the gain to stockholders is negatively related to the frequency of SDD announcements.

This paper analyzes the relation between the capital structure of a firm and the tax benefits realized from the exercise of stock options. Theory suggests that firms with tax benefits from the exercise of stock options should carry less debt since tax benefits are a non-debt tax shield. We find that both long- and short-term debt ratios are negatively related to the size of tax benefits from option exercise. Moreover, one-year changes in long-term leverage are negatively related to changes in the number of options exercised. Such a relation does not exist for changes in short-term leverage. Finally, firms with option-related tax benefits tend to issue equity, with the net amount of equity issued an increasing function of these tax benefits.

This paper analyzes the characteristics and impact of loans made to executives for stock purchase, option exercise, and relocation. We find that loans made to assist executives in purchasing stock or exercising options are larger and have higher interest rates than relocation loans. All types of loans, however, are issued at below-market interest rates, on average. We also find that while stock purchase loans are given to managers with low existing ownership, option exercise loans are given to managers with high existing ownership and high cash compensation. Finally, our results indicate that executive stock ownership increases following stock purchase and option exercise loans. For managers as a whole, a loan that enables a manager to buy 100 shares of stock results in only an eight share increase in ownership. However, the relation between ownership changes and stock purchase loans is much stronger for low ownership managers.

Karen C. Denning, Kuldeep Shastri, Changes in Organizational Structure and Shareholder Wealth: The Case of Limited Partnerships, The Journal of Financial and Quantitative Analysis, Vol. 28, No. 4 (Dec., 1993), pp. 553-564

This paper extends the Roll model for implicit bid-ask spreads by incorporating the possibility of serial correlation in transaction type. The validity of this formula is examined using intra-day transactions and bid-ask spread data for options traded on the Chicago Board Options Exchange. The results indicate that the model derived here closely estimates the effective bid-ask spread in that it explains more than 80 percent of the crosssectional differences in announced bid-ask spreads.