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Warrant Exercise, Dividends, and Reinvestment Policy

Chester S. Spatt and Frederic P. Sterbenz
The Journal of Finance
Vol. 43, No. 2 (Jun., 1988), pp. 493-506
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328472
Stable URL: http://www.jstor.org/stable/2328472
Page Count: 14
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Warrant Exercise, Dividends, and Reinvestment Policy
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Abstract

In this paper, we examine sequential exercise strategies by warrantholders and the gain from hoarding warrants. We analyze several obstacles to acquiring large blocks in order to exploit sequential strategies. First, we identify several reinvestment policies for which sequential exercise is not advantageous, thereby eliminating the gain from hoarding. However, sequential exercise strategies may be advantageous for monopoly or oligopoly warrantholders, even absent dividends, because using exercise proceeds to repurchase stock or to expand the firm's scale increases the riskiness of an equity share. Second, oligopoly warrantholders can receive a smaller warrant value than perfectly competitive warrantholders, suggesting a potential cost to unsuccessful hoarding.

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