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Financial Contracting and Managerial Flexibility

We examine warrant agreements and identify three provisions of these contracts that allow managers to time the raising of capital: the right to call the warrants, to extend the life of the warrants, and to lower the exercise price of the warrants. We argue that these provisions are costly yet frequently used. We find a robust positive association between the inclusion of the extension and reduction provisions, but no association between them and the call provision. We also find a positive association between the inclusion of the extension and reduction provisions and our proxies for investment opportunities.