Discretionary reductions in warrant exercise prices

Managers can decide to reduce a warrant's exercise price. A reduction in exercise price can induce exercise (a conversion-forcing reduction) or not (a long-term reduction). Conversion-Forcing firms show an abnormal return of -1.53% on the announcement day but they perform well over the three: years following the announcement. This finding suggests that the funds raised from warrant exercise are invested in profitable projects, Long-term reductions show an abnormal return of -1.15% on the announcement day. These firms also perform well following the reduction. which suggests that the lower exercise price restores managerial incentives. (C) 2001 Elsevier Science S.A. All rights reserved.