and Managerial Flexibility

We examine warrant agreements and identify three provisions of these con tracts that allow managers to time the raising of capital: the right to call the warrants, the right to extend the life of the warrants, and the right to lower the exercise price of the warrants. We describe possible explanations for their inclusion. We document a positive association between the inclusion of the extension and reduction provisions and proxies for investment opportunities. We also find a positive correlation between the inclusion of the extension and reduction provisions and proxies for stronger corporate governance. Long-run performance measures are similar for firms that do and do not include the flexibility provisions. We interpret the results as supportive of the notion that firms choose optimal contract features to include in their warrant agreements. There is no evidence that managers choose the provisions for self-serving reasons.