Discretionary reductions in warrant exercise prices

John S. Howe, Tie Su

Research output: Contribution to journalArticle

4 Scopus citations

Abstract

Managers can decide to reduce a warrant's exercise price. A reduction in exercise price can induce exercise (a conversion-forcing reduction) or not (a long-term reduction). Conversion-forcing firms show an abnormal return of -1.53% on the announcement day but they perform well over the three years following the announcement. This finding suggests that the funds raised from warrant exercise are invested in profitable projects. Long-term reductions show an abnormal return of -1.15% on the announcement day. These firms also perform well following the reduction, which suggests that the lower exercise price restores managerial incentives.

Original languageEnglish (US)
Pages (from-to)227-252
Number of pages26
JournalJournal of Financial Economics
Volume61
Issue number2
DOIs
StatePublished - Aug 1 2001

Keywords

  • Equity financing
  • Exercise price
  • G32
  • Managerial flexibility
  • Security design
  • Warrants

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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