Unit Initial Public Offerings: Staged Equity or Signaling Mechanism

Abstract

We investigate the use of unit (i.e.,package) initial public offerings by Australian industrial firms and conclude that their use at least partly reflects their role as a signaling mechanism (Chemmanur and Fulghierei, 1997). From a sample of 394 IPOs between 1976 and 1994, the 66 firms making unit offerings are typically riskier, use less prestigous underwriters and have a lower level of retained ownership than other IPO firms. While these results are also consistent with an agency cost explanation for unit offerings (Schultz, 1993), other results we report are not. We find no difference in underpricing between unit IPOs and other IPO firms, nor are there any significant differences in the planned uses of proceeds reported in the prospectus. Moreover, we report evidence consistent with a prediction unique to the signaling explanation. After controlling for the level of ownership retained by insiders, the proportion of firm value sold as warrants is increasing in unit IPO firms' riskiness.

JEL Classification: G32, G12