In-the-Money Warrant Extensions

This paper examines the warrant price and stock price reactions to the extension of the expiration date of in-the-money warrants. The warrant prices increase significantly in response to the announcement, consistent with option pricing theory. Shareholders experience no significant abnormal returns at the announcement, contrary to the conjecture that an extension will transfer wealth from shareholders. There is support for the idea that firms extend warrant life because the existing assets' cash flow obviates the need for additional financing. The data show that both the stocks and the warrants perform poorly in the month following the extension announcement.