Stock Price Management and Share Issuance: Evidence from Equity Warrants

We address whether firms manage stock prices in anticipation of share issuances. A literature in finance attributes negative returns following share issuances to market timing, whereas studies in accounting interpret similar return patterns as evidence of firms managing investor expectations prior to share issuances. To establish that one or the other explains the patterns, one must hold fixed either issuance timing or issuance price. Because warrant expiration dates, which can result in share issuances, are fixed several years in advance, we use stock price patterns before and after the expiration dates to determine whether firms manage stock prices in anticipation of share issuances. Using a sample of warrants over 16 years, we find evidence consistent with firms managing stock prices around warrant expiration dates to induce (prevent) warrant exercise when issuing new shares is expected to be anti-dilutive (dilutive) to existing shareholders. In particular, the return patterns we document are consistent with firms accelerating (delaying) bad news and delaying (accelerating) good news to prevent (induce) warrant exercise and, thus, share issuance. Taken together, our findings reveal that in anticipation of share issuances firms engage in stock price management that increases firm value for existing shareholders.