Stock Price Management and Share Issuance: Evidence from Equity Warrants

53 Pages Posted: 28 Apr 2017  

Mary E. Barth

Stanford University - Graduate School of Business

Kurt H. Gee

Stanford University - Graduate School of Business

Doron Israeli

Interdisciplinary Center (IDC) Herzliya - Arison School of Business

Ron Kasznik

Stanford Graduate School of Business

Date Written: April 27, 2017

Abstract

We address whether firms manage stock prices in anticipation of share issuances. A literature in finance attributes negative returns following share issuances to market timing, whereas studies in accounting interpret similar return patterns as evidence of firms managing investor expectations prior to share issuances. To establish that one or the other explains the patterns, one must hold fixed either issuance timing or issuance price. Because warrant expiration dates, which can result in share issuances, are fixed several years in advance, we use stock price patterns before and after the expiration dates to determine whether firms manage stock prices in anticipation of share issuances. Using a sample of warrants over 16 years, we find evidence consistent with firms managing stock prices around warrant expiration dates to induce (prevent) warrant exercise when issuing new shares is expected to be anti-dilutive (dilutive) to existing shareholders. In particular, the return patterns we document are consistent with firms accelerating (delaying) bad news and delaying (accelerating) good news to prevent (induce) warrant exercise and, thus, share issuance. Taken together, our findings reveal that in anticipation of share issuances firms engage in stock price management that increases firm value for existing shareholders.

Keywords: Stock Warrants; Market Timing; Expectations Management; Share Issuances

JEL Classification: G14; G15; G32; M41

Suggested Citation

Barth, Mary E. and Gee, Kurt H. and Israeli, Doron and Kasznik, Ron, Stock Price Management and Share Issuance: Evidence from Equity Warrants (April 27, 2017). Stanford University Graduate School of Business Research Paper No. 17-34. Available at SSRN: https://ssrn.com/abstract=2959187 or http://dx.doi.org/10.2139/ssrn.2959187

Mary E. Barth

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-9040 (Phone)
650-725-0468 (Fax)

Kurt H. Gee

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305
United States

Doron Israeli (Contact Author)

Interdisciplinary Center (IDC) Herzliya - Arison School of Business ( email )

P.O. Box 167
Herzliya, 46150
Israel
+972 9 952 7673 (Phone)

Ron Kasznik

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-725-9740 (Phone)
650-725-6152 (Fax)

Paper statistics

Downloads
92
Rank
232,770
Abstract Views
539