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Why Include Warrants in New Equity Issues? A Theory of Unit IPOs

Author

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  • Chemmanur, T.J.
  • Fulghieri, P.

Abstract

We develop a theory of unit IPOs in which the firm going public issues a package of equity with warrants. We model an equity market where insiders have private information about the riskiness as well as the expected value of their firm's future cash flows. We demonstrate that, in equilibrium, high risk firms issue underpriced “units” of equity and warrants; lower risk firms, on the other hand, issue underpriced equity alone. In contrast to the existing literature, underpricing arises as a signal in our model in the context of a one-shot equity offering. Though developed in the context of IPOs, our model can also explain the issuance of seasoned equity offerings packaged with warrants. Further, the intuition behind the model generalizes readily to provide a new rationale for packaging call-option-like claims with risky securities other than equity, including convertible debt and debt with warrants.
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Suggested Citation

  • Chemmanur, T.J. & Fulghieri, P., 1994. "Why Include Warrants in New Equity Issues? A Theory of Unit IPOs," Papers 95-05, Columbia - Graduate School of Business.
  • Handle: RePEc:fth:colubu:95-05
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    Cited by:

    1. Lakicevic, Milan & Shachmurove, Yochanan & Vulanovic, Milos, 2014. "Institutional changes of Specified Purpose Acquisition Companies (SPACs)," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 149-169.
    2. Mazouz, Khelifa & Saadouni, Brahim & Yin, Shuxing, 2008. "The long-term performance of Hong Kong share-only and unit initial public offerings (IPOs)," Journal of Multinational Financial Management, Elsevier, vol. 18(3), pages 209-228, July.
    3. García, Diego, 2014. "Optimal contracts with privately informed agents and active principals," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 695-709.
    4. Ola Bengtsson & Na Dai, 2014. "Financial Contracts in PIPE Offerings: The Role of Expert Placement Agents," Financial Management, Financial Management Association International, vol. 43(4), pages 795-832, December.
    5. Fulghieri, Paolo & Garcia, Diego & Hackbarth, Dirk, 2015. "Asymmetric information, security design, and the pecking (dis)order," CEPR Discussion Papers 10660, C.E.P.R. Discussion Papers.
    6. Shachmurove, Yochanan & Vulanovic, Milos, 2017. "U.S. SPACs with a focus on China," Journal of Multinational Financial Management, Elsevier, vol. 39(C), pages 1-18.
    7. Cantale, Salvatore & Russino, Annalisa, 2004. "Putable common stock," Journal of Corporate Finance, Elsevier, vol. 10(5), pages 753-775, November.
    8. Chatterjee, Sris & Chidambaran, N.K. & Goswami, Gautam, 2016. "Security design for a non-standard IPO: The case of SPACs," Journal of International Money and Finance, Elsevier, vol. 69(C), pages 151-178.
    9. Milos Vulanovic, 2017. "SPACs: post-merger survival," Managerial Finance, Emerald Group Publishing, vol. 43(6), pages 679-699, June.
    10. Shachmurove, Yochanan & Vulanovic, Milos, 2014. "SPACs with focus on China," EconStor Preprints 92407, ZBW - German National Library of Economics.
    11. 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.
    12. repec:dau:papers:123456789/2917 is not listed on IDEAS
    13. 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.
    14. Mazouz, Khelifa & Saadouni, Brahim & Yin, Shuxing, 2008. "Warrants in IPOs: Evidence from Hong Kong," Pacific-Basin Finance Journal, Elsevier, vol. 16(5), pages 539-554, November.
    15. Polwat Lerskullawat, 2013. "Warrant Seos in an Emerging Market: Evidence from Thailand," Diversity, Technology, and Innovation for Operational Competitiveness: Proceedings of the 2013 International Conference on Technology Innovation and Industrial Management, ToKnowPress.
    16. Mirjana Cizmovic & Milan Lakicevic & Milos Vulanovic, 2013. "Unit Ipo'S: A Case Of Specified Purpose Acquisition Companies (Spacs)," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 9(1), pages 45-52.
    17. 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).

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    Keywords

    FINANCIAL MARKET; ENTREPRISES; RISK; ECONOMIC MODELS;

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