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Evidence on the issuer effect in warrant overpricing

Author

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  • Geoffrey Loudon
  • Kien Nguyen

Abstract

Prior literature offers evidence that warrant prices tend to be higher than the prices of matched options. Explanations for warrant overpricing include a liquidity premium, hedging costs, market power and investor perceptions. Each of these explanations suggest that overpricing is likely to be related to the identity of the issuer. Any such issuer effect may also be affected by differences in credit risk. This study reconfirms the existence of a large excess warrant premium and provides evidence that it is significantly related to the identity of the warrant issuer, even after taking into account important liquidity and hedging factors.

Suggested Citation

  • Geoffrey Loudon & Kien Nguyen, 2006. "Evidence on the issuer effect in warrant overpricing," Applied Financial Economics, Taylor & Francis Journals, vol. 16(3), pages 223-232.
    • Handle: RePEc:taf:apfiec:v:16:y:2006:i:3:p:223-232
    DOI: 10.1080/09603100500390976
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    References listed on IDEAS

    as
    1. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    2. Chan, Howard Wei-Hong & Pinder, Sean M., 2000. "The value of liquidity: Evidence from the derivatives market," Pacific-Basin Finance Journal, Elsevier, vol. 8(3-4), pages 483-503, July.
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    Cited by:

    1. José Eduardo Correia & João Duque, 2008. "Dilution and Dividend Effects on the Portuguese Equity Warrants Market," Portuguese Journal of Management Studies, ISEG, Universidade de Lisboa, vol. 0(2), pages 161-192.
    2. Andrea Schertler & Saskia Stoerch, 2018. "Warrant price responses to credit spread changes: Fact or fiction?," Review of Financial Economics, John Wiley & Sons, vol. 36(3), pages 206-219, July.

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