Stock Price Management and Share Issuance: Evidence from Equity Warrants
52 Pages Posted: 28 Apr 2017 Last revised: 12 Jun 2019
Date Written: June 9, 2019
We investigate whether firms manage stock prices prior to share issuances. Prior research largely interprets negative returns following share issuances as evidence of market timing. Other studies interpret similar evidence as firms managing investor expectations, and thus stock prices. Although these explanations are not mutually exclusive, establishing evidence for the expectations management explanation requires a setting in which share issuance timing is fixed. Warrant exercise can result in share issuances and warrant expiration dates are fixed years in advance. Thus, we use return patterns before and after warrant expiration dates to determine whether firms manage investor expectations prior to share issuances. Our evidence is consistent with firms managing stock prices to prevent (induce) warrant exercise when issuing the new shares is dilutive (anti-dilutive) to existing shareholders. Our findings reveal that firms engage in stock price management around equity issuance in a setting where market timing cannot explain the return patterns.
Keywords: Stock Warrants; Market Timing; Expectations Management; Share Issuances
JEL Classification: G14; G15; G32; M41
Suggested Citation: Suggested Citation