Long‐Run Stock and Operating Performance of Underwriter Warrants: Evidence from Seasoned Equity Offerings

29 Pages Posted: 10 Dec 2013

See all articles by Sung C. Bae

Sung C. Bae

Bowling Green State University - Department of Finance

Kiyoung Chang

University of South Florida Sarasota-Manatee - College of Business

Hoje Jo

Santa Clara University

Date Written: December 2013

Abstract

We examine the long‐run stock and operating performance of firms issuing underwriter warrants. Using matched samples, we found significant long‐run underperformance of seasoned equity offerings (SEOs) with warrant compensation, relative to SEOs with cash compensation, following offering announcements. Profitability measures of firms issuing underwriter warrants are also significantly lower over the post‐offering period. In sharp contrast to these results, growth measures of warrant‐issuing firms are greater for both pre‐ and post‐offering periods. Combined together, our results suggest that underwriter warrants are offered in a way to take advantage of the higher growth potential of issuing firms in the short term, whose growth trend is, however, transitory and not materialized into higher stock or operating performance over the long‐run, post‐offering period. We interpret our results as suggesting that the certification effect of SEOs with warrant compensation through growth signaling does not last in the long run. We further offer a behavioral approach as explanations of the short‐run outperformance of SEO firms with warrant compensation with empirical evidence supporting the Miller's divergence of opinion hypothesis.

Suggested Citation

Bae, Sung C. and Chang, Kiyoung and Jo, Hoje, Long‐Run Stock and Operating Performance of Underwriter Warrants: Evidence from Seasoned Equity Offerings (December 2013). International Review of Finance, Vol. 13, Issue 4, pp. 473-501, 2013. Available at SSRN: https://ssrn.com/abstract=2365949 or http://dx.doi.org/10.1111/irfi.12007

Sung C. Bae (Contact Author)

Bowling Green State University - Department of Finance ( email )

Business Administration 201
Bowling Green, OH 43403
United States
419-372-8714 (Phone)
419-372-2875 (Fax)

Kiyoung Chang

University of South Florida Sarasota-Manatee - College of Business ( email )

8350 N. Tamiami Trail, SMC-C263
Sarasota, FL 34243-2025
United States
9413594359 (Phone)
9413594367 (Fax)

Hoje Jo

Santa Clara University ( email )

Santa Clara, CA 95053
United States
408-224-8890 (Phone)
408-554-4029 (Fax)

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