Managerial Discretion Costs and the Acquisition of Capital: Evidence from Forced Warrant Exercise

Forced warrant exercise should elicit a stock price reaction only in response to inventory adjustments or unanticipated increases in agency costs. We find evidence of both effects. Firms calling warrants for redemption experience negative abnormal returns on the announcement date. Negative returns are concentrated among firms whose characteristics suggest that the call should have been deferred. We find lower announcement returns among inefficient firms with low leverage-firms for which the agency costs of managerial discretion may be high. All else equal, announcement returns are lower among inefficient firms that invested heavily in the year after forced exercise.