The Information Content of Put Warrant Issues

Abstract

We show that put warrant issues can be used to signal a firm's superior prospects to a market that is not aware of them. One benefit of using put warrants to signal, particularly for growth firms, is that a firm receives cash when sending the signal, instead of paying out cash. We establish conditions under which put warrants are issued in a separating equilibrium. We then test our theory using a new data set on put warrant issues. The data support our model: put warrant issuers strongly outperform their peers in the years after the put warrant issues.

Keywords: Put warrants, share repurchases, signaling

JEL Classification: G35, G32, D82