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Discretionary reductions in warrant exercise prices

Authors
Journal
Journal of Financial Economics
0304-405X
Publisher
Elsevier
Publication Date
Volume
61
Issue
2
Identifiers
DOI: 10.1016/s0304-405x(01)00061-7
Keywords
  • Warrants
  • Equity Financing
  • Exercise Price
  • Managerial Flexibility
  • Security Design

Abstract

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.

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