Academic journal article Academy of Accounting and Financial Studies Journal

Impact of Warrant Listings on Its Underlying Stocks: The Malaysian Evidence

Academic journal article Academy of Accounting and Financial Studies Journal

Impact of Warrant Listings on Its Underlying Stocks: The Malaysian Evidence

Article excerpt


After several years of lacklustre performance, the Malaysian stock market is currently one of Asia's best-performing stock markets. Malaysia has finally drawing strength from attractive valuations and fast-growing economy with more prudent government policies. The Kuala Lumpur Composite Index (KLCI) has risen 52% in the past 12 months. In tandem with the upbeat sentiment, warrants are back in the limelight as rising equity prices on the local bourse is drawing investors' attention to such issues.

Although Bursa Malaysia already has a large number of warrants listed, the research on this exotic derivative instrument is still lacking. Hence, this study is motivated to extract information on the warrant market by documenting and analyzing the impact of warrant listings on the trading behaviour of underlying stocks on Bursa Malaysia. More specifically, this study analyses the behaviour of underlying stocks' price, systematic risk (beta) and volume surrounding the introduction of company-issued warrants.

This study contributes to the literature in several ways. Firstly, existing literatures largely focused on listing impact of options and call warrants and little attention has been given to company-issued warrant. It has been widely accepted that option or call warrant introductions will generally be associated with significant increase in price and liquidity while decline in volatility in the underlying market. Hence, this study is keen to find out the sustainability of these results from the perspective of company-issued warrant based on the Malaysian environment. Secondly, this study aims to provide warrant issuers an insight regarding the behaviour of underlying stock price, systematic risk and trading volume surrounding the event dates of warrant issues. The preference of an issue will largely depend on how the market quality of the underlying stock is influenced by the warrant introduction. Thus, the results of this study can assist warrant issuers to gain a better understanding of the trading behaviour in underlying stocks surrounding warrant listings and thus enabling them to make informed decisions. Thirdly, there have been some worries that the existence of derivative instruments may increase the volatility of stock returns due to more speculation and hedging activities of traders. Since the Malaysian derivative market is still at its infancy stage, market regulators may use the results of this study as a reference in establishing proper market regulations to ensure the smooth running and healthy development of Malaysian derivative market.

The remainder of this paper is organised as follows. The following section provides an overview of Malaysian warrant market. The third section explains the theoretical background and previous studies. The fourth section describes the data and method employed. The fifth section discusses the empirical results. Finally, the sixth section presents some concluding remarks.


Warrant is financial derivatives which 'derive' its value from other assets. The underlying asset may be any asset including a single stock, a basket of stocks, an index, a currency, a commodity or future contracts. Warrant gives the buyer the right, but not the obligations, to buy or sell an underlying asset at a pre-determined price (commonly referred to as the strike price or exercise price) on or before a specified date (commonly referred to as the expiry date or maturity date). Currently, all warrants listed on Bursa Malaysia are on the 'buy side' and are all stock-based (that is, the underlying asset is a stock). In Malaysia, prior to the amendment of Section 57 of the Companies Act 1965, warrants were known as Transferable Subscription Rights (TSRs). With the amendment of the said Act, the term 'TSR' is now obsolete. There are two major types of warrants traded on Bursa Malaysia: call warrants and company-issued warrants (or, simply, warrant). …

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