The question we address is whether firms manage stock prices prior to share issuances. Prior literature largely interprets negative returns following share issuances as evidence of market timing. Other studies interpret similar evidence as firms managing investor expectations. Although these are not mutually exclusive explanations, establishing expectations management as an explanation for the returns requires that issuance timing is fixed. Warrant exercise can result in share issuances and warrant expiration dates are fixed years in advance. Thus, we use return patterns before and after warrant expiration dates to determine whether firms manage investor expectations, and thus stock prices, prior to share issuances. We find evidence consistent with firms managing stock prices to induce (prevent) warrant exercise when issuing the new shares is anti-dilutive (dilutive) to existing shareholders. Our findings reveal that firms engage in stock price management around equity issuance in a setting where market timing cannot explain the results.
|Publication status||Submitted - 2019|
- Stock Warrants
- Market Timing
- Expectations Management
- Share Issuances