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Why do companies include warrants in seasoned equity offerings?

Author

Listed:
  • Gajewski, Jean-Francois
  • Ginglinger, Edith
  • Lasfer, Meziane

Abstract

We analyze the reasons why companies issue units when they raise additional capital. We find that, in contrast to previous evidence, units are not offered to mitigate the agency conflicts or to signal security mispricing as they are predominantly issued during cold periods, in public rather than in rights offerings, and when the issue is underwritten. In addition, the results indicate that companies choose to offer units to increase their offer price flexibility and to underprice their seasoned equity offering so as to minimize the issue cost and the risk of failure of the issue. These results provide support for the net proceeds maximization hypothesis.
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Suggested Citation

  • Gajewski, Jean-Francois & Ginglinger, Edith & Lasfer, Meziane, 2007. "Why do companies include warrants in seasoned equity offerings?," Journal of Corporate Finance, Elsevier, vol. 13(1), pages 25-42, March.
  • Handle: RePEc:eee:corfin:v:13:y:2007:i:1:p:25-42
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    References listed on IDEAS

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    1. Jean-François Gajewski & Edith Ginglinger, 2002. "Seasoned Equity Issues in a Closely Held Market: Evidence from France," Review of Finance, European Finance Association, vol. 6(3), pages 291-319.
    2. Booth, James R. & Chua, Lena, 1996. "Ownership dispersion, costly information, and IPO underpricing," Journal of Financial Economics, Elsevier, vol. 41(2), pages 291-310, June.
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    4. Eckbo, B. Espen & Masulis, Ronald W., 1992. "Adverse selection and the rights offer paradox," Journal of Financial Economics, Elsevier, vol. 32(3), pages 293-332, December.
    5. How, Janice C Y & Howe, John S, 2001. "Warrants in Initial Public Offerings: Empirical Evidence," The Journal of Business, University of Chicago Press, vol. 74(3), pages 433-457, July.
    6. Welch, Ivo, 1996. "Equity offerings following the IPO theory and evidence," Journal of Corporate Finance, Elsevier, vol. 2(3), pages 227-259, February.
    7. Chemmanur, Thomas J. & Fulghieri, Paolo, 1997. "Why Include Warrants in New Equity Issues? A Theory of Unit IPOs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(01), pages 1-24, March.
    8. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
    9. Schultz, Paul, 1993. "Unit initial public offerings *1: A form of staged financing," Journal of Financial Economics, Elsevier, vol. 34(2), pages 199-229, October.
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    11. Soku Byoun, 2004. "Stock Performance following Seasoned Stock-Warrant Unit Offerings," The Journal of Business, University of Chicago Press, vol. 77(1), pages 75-100, January.
    12. Lucas, Deborah J & McDonald, Robert L, 1990. " Equity Issues and Stock Price Dynamics," Journal of Finance, American Finance Association, vol. 45(4), pages 1019-1043, September.
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    17. Jain, Bharat A., 1994. "The underpricing of 'unit' initial public offerings," The Quarterly Review of Economics and Finance, Elsevier, vol. 34(3), pages 309-325.
    18. Byoun, Soku & Moore, William T., 2003. "Stock vs. stock-warrant units: evidence from seasoned offerings," Journal of Corporate Finance, Elsevier, vol. 9(5), pages 575-590, November.
    19. Bayless, Mark & Chaplinsky, Susan, 1996. " Is There a Window of Opportunity for Seasoned Equity Issuance?," Journal of Finance, American Finance Association, vol. 51(1), pages 253-278, March.
    20. Ritter, Jay R., 2003. "Investment banking and securities issuance," Handbook of the Economics of Finance,in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 5, pages 255-306 Elsevier.
    21. Allen, Franklin & Faulhaber, Gerald R., 1989. "Signalling by underpricing in the IPO market," Journal of Financial Economics, Elsevier, vol. 23(2), pages 303-323, August.
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    Cited by:

    1. David, Thomas & Ginglinger, Edith, 2016. "When cutting dividends is not bad news: The case of optional stock dividends," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 174-191.
    2. Trien Le & Amon Chizema, 2011. "State ownership and firm performance: Evidence from the Chinese listed firms," Organizations and Markets in Emerging Economies, Faculty of Economics, Vilnius University, vol. 2(2).
    3. repec:sae:ausman:v:42:y:2017:i:4:p:608-636 is not listed on IDEAS

    More about this item

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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