The Information Content of Put Warrant Issues

Paul Povel, Scott Gibson, Rajdeep Singh
2004 Social Science Research Network  
Povel) and (Singh). We are grateful to Sugato Bhattacharyya, Abstract We analyze why firms may want to issue put warrants, i.e., promises to repurchase their own shares at a given price in the future. We describe four alternative explanations, one of which is novel: that put warrants are issued by firms that wish to signal their good future prospects to their investors (who undervalue the firms in the eyes of their managers). We test the validity of the four alternative
more » ... ions, using a new, hand-collected data set on put warrant issues in the U.S. between 1993 and 1999. We find evidence that is inconsistent with three of the four explanations. Only the signaling explanation is consistent with the empirical evidence. Put warrant issuers strongly outperform their peers in the years after the put warrant issues; they enjoy valuable and improving investment opportunities, and they invest heavily. Put warrant issuers are thus very different from other firms with ongoing open market share repurchase programs. JEL codes: G35, G32, D82 : mean and median significance levels for the difference between means and medians for put issuers and share repurchasers, at the 1, 5 and 10 percent levels, respectively (using the two-sided t test, and the Wilcoxon signed-rank and rank-sum tests).
doi:10.2139/ssrn.561021 fatcat:iiulhsehqvhedahuywxadm3paq