Discretionary Reductions in Warrant Exercise Prices

42 Pages Posted: 20 Nov 2000

See all articles by John S. Howe

John S. Howe

University of Missouri at Columbia - Department of Finance

Tie Su

University of Miami - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October 2000

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.

JEL Classification: G32

Suggested Citation

Howe, John S. and Su, Tie, Discretionary Reductions in Warrant Exercise Prices (October 2000). Available at SSRN: https://ssrn.com/abstract=245487 or http://dx.doi.org/10.2139/ssrn.245487

John S. Howe (Contact Author)

University of Missouri at Columbia - Department of Finance ( email )

224 Middlebush Hall
Columbia, MO 65211
United States
573-882-5357 (Phone)
573-884-6296 (Fax)

Tie Su

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
305-284-1885 (Phone)
305-284-4800 (Fax)

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