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Warrant Exercise, Dividends, and Reinvestment Policy

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  • Spatt, Chester S
  • Sterbenz, Frederic P
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    Abstract

    This paper examines sequential exercise strategies by warrant holders and the gain from hoarding w arrants. Several obstacles to acquiring large blocks to exploit seque ntial strategies are analyzed. First, several reinvestment policies a re identified for which sequential exercise is not advantageous, ther eby eliminating the gain from hoarding. However, sequential exercise strategies may be advantageous for monopoly or oligopoly warrant hold ers, even absent dividends, because using exercise proceeds to repurc hase stock or to expand the firm's scale increases the riskiness of e quity. Second, oligopoly warrant holders can receive a smaller warran t value than perfectly competitive warrant holders, suggesting a pote ntial cost to unsuccessful hoarding. Copyright 1988 by American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal Journal of Finance.

    Volume (Year): 43 (1988)
    Issue (Month): 2 (June)
    Pages: 493-506

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    Handle: RePEc:bla:jfinan:v:43:y:1988:i:2:p:493-506

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    Cited by:
    1. Darsinos, T. & Satchell, S.E., 2002. "On the Valuation of Warrants and Executive Stock Options: Pricing Formulae for Firms with Multiple Warrants/Executive Options," Cambridge Working Papers in Economics 0218, Faculty of Economics, University of Cambridge.
    2. Hanke, Michael & Potzelberger, Klaus, 2002. "Consistent pricing of warrants and traded options," Review of Financial Economics, Elsevier, vol. 11(1), pages 63-77.
    3. Nikunj Kapadia & Gregory Willette, 2012. "Equilibrium exercise of European warrants," Review of Derivatives Research, Springer, vol. 15(2), pages 129-156, July.

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