Discretionary reductions in warrant exercise prices

John S. Howe; Tie Su

doi:10.1016/S0304-405X(01)00061-7

Discretionary reductions in warrant exercise prices

John S. Howe, Tie Su

Finance

Research output: Contribution to journal › Article › peer-review

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 language	English (US)
Pages (from-to)	227-252
Number of pages	26
Journal	Journal of Financial Economics
Volume	61
Issue number	2
DOIs	https://doi.org/10.1016/S0304-405X(01)00061-7
State	Published - Aug 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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title = "Discretionary reductions in warrant exercise prices",

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.",

keywords = "Equity financing, Exercise price, G32, Managerial flexibility, Security design, Warrants",

author = "Howe, {John S.} and Tie Su",

note = "Funding Information: The first author acknowledges financial support from the University of Missouri Research Board and the College of Business at the University of Missouri. The second author acknowledges financial support from the School of Business, University of Miami. The authors are appreciative for the valuable suggestions of an anonymous referee and the useful comments of G. William Schwert (the editor). We also note the exemplary computing support of Ron Howren and Murali Jagannathan, and the helpful comments of Chris Anderson, Tim Burch, Doug Emery, Pat Fishe, Larry Goldberg, Andrea Heuson, and Mitchell Petersen. Thanks also to Yongyong Mu for data collection. Copyright: Copyright 2005 Elsevier Science B.V., Amsterdam. All rights reserved.",

year = "2001",

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doi = "10.1016/S0304-405X(01)00061-7",

language = "English (US)",

volume = "61",

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journal = "Journal of Financial Economics",

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AU - Su, Tie

N1 - Funding Information: The first author acknowledges financial support from the University of Missouri Research Board and the College of Business at the University of Missouri. The second author acknowledges financial support from the School of Business, University of Miami. The authors are appreciative for the valuable suggestions of an anonymous referee and the useful comments of G. William Schwert (the editor). We also note the exemplary computing support of Ron Howren and Murali Jagannathan, and the helpful comments of Chris Anderson, Tim Burch, Doug Emery, Pat Fishe, Larry Goldberg, Andrea Heuson, and Mitchell Petersen. Thanks also to Yongyong Mu for data collection. Copyright: Copyright 2005 Elsevier Science B.V., Amsterdam. All rights reserved.

PY - 2001/8

Y1 - 2001/8

N2 - 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.

AB - 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.

KW - Equity financing

KW - Exercise price

KW - G32

KW - Managerial flexibility

KW - Security design

KW - Warrants

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EP - 252

JO - Journal of Financial Economics

JF - Journal of Financial Economics

SN - 0304-405X

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ER -

Discretionary reductions in warrant exercise prices

Abstract

Keywords

ASJC Scopus subject areas

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