The Market Reaction to Warrant Calls: An Agency Cost Explanation

24 Pages Posted: 15 Jan 2001

See all articles by Brian L. Betker

Brian L. Betker

Saint Louis University

Michael J. Alderson

Saint Louis University - Richard A. Chaifetz School of Business

Date Written: December 2000

Abstract

A warrant call should only elicit a stock price reaction when there are agency costs of managerial discretion, because in this case the gains to shareholders from expropriating the time premium of the warrants may be offset by the losses when managers invest the proceeds in negative NPV projects. We relate warrant call announcement returns to proxies for the costs of managerial discretion and find support for this argument. We observe lower announcement returns among firms that have low leverage and are inefficient. All other things equal, announcement returns are lower among inefficient firms that invested heavily in the year after the warrant call and among high leverage firms that reduced their debt levels.

Keywords: Warrants, agency costs, raising capital

JEL Classification: G32

Suggested Citation

Betker, Brian L. and Alderson, Michael J., The Market Reaction to Warrant Calls: An Agency Cost Explanation (December 2000). Available at SSRN: https://ssrn.com/abstract=255753 or http://dx.doi.org/10.2139/ssrn.255753

Brian L. Betker (Contact Author)

Saint Louis University ( email )

St. Louis, MO 63108-3397
United States

Michael J. Alderson

Saint Louis University - Richard A. Chaifetz School of Business ( email )

3674 Lindell Blvd
St. Louis, MO 63108-3397
United States
314-977-8169 (Phone)
314-977-3897 (Fax)

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