TY - JOUR

T1 - Warrant price responses to credit spread changes

T2 - Fact or fiction?

AU - Schertler, Andrea

AU - Störch, Saskia

PY - 2018/7/1

Y1 - 2018/7/1

N2 - We use a new approach to analyze the relationship between warrant prices and issuers' credit spreads. This approach allows us to gain insights into whether issuers use their credit risk systematically to increase their profits. In a post-Lehman sample, we find strong support for a systematic use since issuers decrease prices less after credit spread increases than they increase prices after credit spread decreases. Credit spread decreases are accompanied by price increases on several successive days. This sluggish adjustment in prices can be explained by the fact that retail investors' purchase decisions depend on product prices.

AB - We use a new approach to analyze the relationship between warrant prices and issuers' credit spreads. This approach allows us to gain insights into whether issuers use their credit risk systematically to increase their profits. In a post-Lehman sample, we find strong support for a systematic use since issuers decrease prices less after credit spread increases than they increase prices after credit spread decreases. Credit spread decreases are accompanied by price increases on several successive days. This sluggish adjustment in prices can be explained by the fact that retail investors' purchase decisions depend on product prices.

KW - Credit spreads

KW - Overshooting

KW - Price changes

KW - Sluggish adjustment

KW - Warrants

KW - Entrepreneurship

KW - Economics

UR - http://www.scopus.com/inward/record.url?scp=85082354832&partnerID=8YFLogxK

U2 - 10.1016/j.rfe.2017.03.002

DO - 10.1016/j.rfe.2017.03.002

M3 - Journal articles

VL - 36

SP - 206

EP - 219

JO - Review of Financial Economics

JF - Review of Financial Economics

SN - 1058-3300

IS - 3

ER -