Do issuers affect derivative warrants overpricing? evidence of Thailand

Abstract

Derivative warrants have become increasingly popular in many countries. However, numerous literatures provide the empirical evidences that derivative warrants are overpriced relative to the comparable options. Many researchers found that the derivative warrant overpricing can be explained by hedging cost, liquidity premium, market power, and asymmetric information of investors. These explanations are likely to be related to characteristics of derivative warrant issuer. Therefore, this paper comes up with the objective to reconfirm the overpricing phenomenon in Thailand and investigate the issuer identity effect on the derivative warrant overpricing as well as examine what issuer’s characteristics cause the level of overpricing differ across issuers. The results demonstrate that Thai derivative warrants tend to be overpriced and the nature of the overpricing phenomenon has changed due to the SEC revised disclosure regulation and the underlying market conditions. Furthermore, the results also show the existence of issuer identity effect on the overpricing level. The overpricing level is different across issuers and ranging from 2.77 to 66.15 percent. The findings can be explained through the issuer’s characteristics, namely, market share of issuer, credit risk of issuer, foreign issuer, and style of calculating time decay.