Resale options and heterogeneous beliefs

The resale option theory states investors buy an asset containing a resale option where the value is tied to differences in opinion and short‐sale constraints. This study tests the validity of the resale option theory using warrants sold by individuals to other individuals in Taiwan. The findings of this study support the resale option theory. First, heterogeneous beliefs concerning warrant fundamentals and the fluctuation of heterogeneous beliefs are positively related to resale options. Second, when the estimation accounts for the float, risk‐bearing ratio, and floats relative to risk‐bearing capacity, the theory is valid. Third, the theory holds under the convergence of opinion differences around earnings announcements because resale options have a stronger link before the announcements than after the events. Finally, the holding‐period returns over the short‐term horizon are positive under an increase in opinion differences, consistent with the theory of resale options.