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The Impact of Warrants and Convertible Securities on the Systematic Risk of Common Equity

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  • Ehrhardt, Michael C
  • Shrieves, Ronald E

Abstract

This paper addresses the relationship between the capital structure and the systematic risk of common equity for a firm whose capital structure includes convertible securities. Adding warrants to the capital structure reduces the systematic risk of equity, which is consistent with the fact that warrants dampen the volatility of equity by reducing the upside potential gains of existing stockholders. Expressions showing the impact of conversion features in debt and preferred stock on the systematic risk of equity are derived, and contrasted with the systematic risk effects of non-convertible debt or non-convertible preferred stock financing. Failure to incorporate conversion features may lead to serious errors in assessing the impact of financing alternatives on the risk of equity. Copyright 1995 by MIT Press.

Suggested Citation

  • Ehrhardt, Michael C & Shrieves, Ronald E, 1995. "The Impact of Warrants and Convertible Securities on the Systematic Risk of Common Equity," The Financial Review, Eastern Finance Association, vol. 30(4), pages 843-856, November.
    • Handle: RePEc:bla:finrev:v:30:y:1995:i:4:p:843-56
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    Cited by:

    1. Bajo, Emanuele & Barbi, Massimiliano, 2012. "The role of time value in convertible bond call policy," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 550-563.
    2. Lally, Martin & Swidler, Steve, 2003. "The effect of an asset's market weight on its beta: implications for international markets," Journal of Multinational Financial Management, Elsevier, vol. 13(2), pages 161-170, April.
    3. Martin Lally, 2004. "Betas and Industry Weights," Australian Journal of Management, Australian School of Business, vol. 29(1), pages 109-120, June.

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