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Warrants and their agency issues: Investment timing, financing, and default effects

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  • McWalter, Thomas A.
  • Ritchken, Peter H.

Abstract

Equity, contingent equity, and debt are jointly determined as claims on the assets of the firm. Contingent equity, in the form of warrants, impacts the dynamics of shareholder equity, alters the timing of bankruptcy, the timing of exercising growth options, and the financing of new investments. Since warrants may be materially affected by a range of corporate activities, they are provided with certain protections that only partially mitigate agency conflicts. The magnitude of agency costs created by warrants also depends on the proportion of them held by equity holders versus outsiders. The purpose of our research is to investigate these agency issues in a full-information setting. As the magnitude of the warrant issue increases, default thresholds increase, growth options are exercised earlier, and less debt is used for financing.

Suggested Citation

  • McWalter, Thomas A. & Ritchken, Peter H., 2026. "Warrants and their agency issues: Investment timing, financing, and default effects," Journal of Corporate Finance, Elsevier, vol. 99(C).
    • Handle: RePEc:eee:corfin:v:99:y:2026:i:c:s0929119926000477
    DOI: 10.1016/j.jcorpfin.2026.102989
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