Sequential Warrant Exercise in Large Trader Economies

30 Pages Posted: 9 Mar 2008 Last revised: 20 Jun 2008

See all articles by Tobias Linder

Tobias Linder

University of Mainz

Siegfried Trautmann

Johannes Gutenberg University Mainz - Faculty of Law and Economics

Date Written: September 2007

Abstract

It is well known that the sequential (premature) exercise of American-type warrants "may" be advantageous for large warrantholders, even in the absence of regular dividends, because using exercise proceeds to expand the firm's scale increases the riskiness of an equity share. We present sufficient conditions for the non-optimality of sequential exercise implying that for realistic interest rate levels even large warrantholders are better off not to exercise long before maturity. This result, however, does not justify in general the simplifying restriction that warrants or convertible securities are valued as if exercised as a block.

Keywords: Warrants, Large Trader, Sequential Exercise, Partial Exercise Option

JEL Classification: C72, G12, G13, G32

Suggested Citation

Linder, Tobias and Trautmann, Siegfried, Sequential Warrant Exercise in Large Trader Economies (September 2007). EFA 2008 Athens Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1102665 or http://dx.doi.org/10.2139/ssrn.1102665

Tobias Linder

University of Mainz ( email )

Saarstrasse 21
Mainz, D-55099
Germany

Siegfried Trautmann (Contact Author)

Johannes Gutenberg University Mainz - Faculty of Law and Economics ( email )

Chair of Corporate Finance
D-55099 Mainz, 55128
Germany
+49 6131 39 23761 (Phone)
+49 6131 39 23766 (Fax)

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