Subscription price discounts of stock warrants and cost of potential ownership dilution

Abstract

We examine two important views in the literature of warrants: the undervaluation signal of firm value associated with out-of-the-money warrants and the usage of warrants as multistage financing instruments. Based on our sample of Hong Kong standalone warrants from 1999 to 2022, our results show that stock prices of the issuers fall following warrant issuances and, without persuasive warrant attributes, the likelihood of warrant exercises is low. The two views are not supported. We argue that subscription price discounts reflect the cost of potential ownership dilution to existing shareholders, and we find that firms with greater financing needs set higher price discounts as a persuasive warrant attribute to increase the likelihood of warrant exercises.

Keywords: Standalone warrants, undervaluation, multistage financing instruments

JEL Classification: G14, G11