Warrants in IPOs: Evidence from Hong Kong
We examine whether the Hong Kong Stock Exchange listed firms include warrants in their initial public offerings (IPOs) to signal their quality. We show that IPOs with warrants have higher profitability and better asset utilization rates compared to IPOs without warrants. We also report evidence that after controlling for the level of retained ownership, the proportion of the firm value sold as warrants increases in firm's riskiness. The results from the self-selection model reveal that firms include warrants in their offerings to reduce underpricing relative to what it would have been in the absence of warrants. We conclude that warrants are more likely to be used for signaling purposes rather than as mechanisms to reduce the agency costs of free cash flow.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bradley, Daniel J. & Jordan, Bradford D., 2002. "Partial Adjustment to Public Information and IPO Underpricing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(04), pages 595-616, December.
- 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.
- Firth, Michael & Liau-Tan, Chee Keng, 1997. "Signalling models and the valuation of new issues: An examination of IPOs in Singapore," Pacific-Basin Finance Journal, Elsevier, vol. 5(5), pages 511-526, December.
- Lee, Lung-Fei, 1978. "Unionism and Wage Rates: A Simultaneous Equations Model with Qualitative and Limited Dependent Variables," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 19(2), pages 415-33, June.
- Chan, Yue-cheong & Wei, K. C. John, 2001. "Price and volume effects associated with derivative warrant issuance on the Stock Exchange of Hong Kong," Journal of Banking & Finance, Elsevier, vol. 25(8), pages 1401-1426, August.
- Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
- Su, Dongwei & Fleisher, Belton M., 1999. "An empirical investigation of underpricing in Chinese IPOs," Pacific-Basin Finance Journal, Elsevier, vol. 7(2), pages 173-202, May.
- Chemmanur, T.J. & Fulghieri, P., 1994.
"Why Include Warrants in New Equity Issues? A Theory of Unit IPOs,"
95-05, Columbia - Graduate School of Business.
- 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.
- 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 433-57, July.
- Chen, Gongmeng & Firth, Michael & Krishnan, Gopal V., 2001. "Earnings forecast errors in IPO prospectuses and their associations with initial stock returns," Journal of Multinational Financial Management, Elsevier, vol. 11(2), pages 225-240, April.
- Martin Lee & Philip Lee & Stephen Taylor, 2003. "Unit initial public offerings: Staged equity or signaling mechanism?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 43(1), pages 63-85.
- 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.
- Jacqueline L. Garner & Beverly B. Marshall, 2005. "Unit IPOs: What the Warrant Characteristics Reveal about the Issuing Firm," The Journal of Business, University of Chicago Press, vol. 78(5), pages 1837-1858, September.
When requesting a correction, please mention this item's handle: RePEc:eee:pacfin:v:16:y:2008:i:5:p:539-554. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If references are entirely missing, you can add them using this form.