Warrant price responses to credit spread changes: Fact or fiction?

We use a new approach to analyze the relationship between warrant prices and issuers' credit spreads. This approach allows us to gain insights into whether issuers use their credit risk systematically to increase their profits. In a post-Lehman sample, we find strong support for a systematic use since issuers decrease prices less after credit spread increases than they increase prices after credit spread decreases. Credit spread decreases are accompanied by price increases on several successive days. This sluggish adjustment in prices can be explained by the fact that retail investors' purchase decisions depend on product prices.