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Warrant price responses to credit spread changes: Fact or fiction?
Author(s) -
Schertler Andrea,
Stoerch Saskia
Publication year - 2018
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2017.03.002
Subject(s) - warrant , issuer , monetary economics , economics , sample (material) , business , credit rating , financial economics , financial system , finance , chemistry , chromatography
Abstract 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 cred it 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.