Modern Corporate Finance (MCF) and the Rise of the Contingent Claims Analysis (CCA) Era

At the IRMC conference in Florence, Italy, in June 2023, we devoted a special session to mark the 50th anniversary of the publication of two seminal papers that had a major impact on the field of Finance: one by Black and Scholes and the other by Merton. Both papers proposed an analytical solution to the valuation of European options, both leading to the same formula, while providing two different methods to prove the model. The impact of the Option Pricing Model (OPM) of BSM has been vast, affecting the valuation of derivatives, influencing trading instruments and strategies, transforming over time the entire field of corporate finance, such that all claims on the corporation can be seen as derivatives on the firm’s assets. In this note, we concentrate on the applications of the OPM to corporate finance. This “contingent claims” approach has ushered in a new era in corporate finance. Below, we highlight some of the seminal papers that have had a vast influence on the analysis of the way firms finance their investments and the methods used to determine the value of stakeholder claims.