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A rights issue is the granting by a corporation to its shareholders of a right to purchase $N$ new shares for each $M$ shares they already hold at a (often discounted) price $K$. Thus, it superficially resembles a call option, but because every shareholder is holding such options, dilution of the stock value is unavoidable. Are there any papers out there which would contain a description of a risk-neutral valuation of rights issue, e.g. using a modified Black-Scholes model?

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I think Hull treats dilution in his book, and it's extensible to this case. For what it's worth, the strike is typically set low enough that there's little doubt about exercise, meaning there's not much point in modeling the optionality. Most people concentrate on the dilution alone -- particularly the question of the change in fully diluted versus undiluted shares outstanding.

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