Using Put Warrants to Reduce Corporate Financing Costs

43 Pages Posted: 7 Sep 2000

See all articles by Rajdeep Singh

Rajdeep Singh

University of Minnesota - Twin Cities - Carlson School of Management

Scott Gibson

College of William and Mary - Mason School of Business

Abstract

We show that put warrants can reduce financing costs when managers know more about the firm's future prospects than do outside investors. Put warrants are shown to be an efficient security in eliminating adverse selection costs in that firms can credibly reveal favorable private information without having to resort to "money burning" or inefficient investment decisions. Among the model's implications are that (i) put warrants are effective whether or not they are attached directly to equity shares, (ii) the number of puts issued must exceed the number of new shares issued, and (iii) a ceiling exists on the amount of project financing that a firm can successfully raise. Additionally our analysis provides practical insights into how the size and exercise price of the put warrant offering affect issues such as corporate control and the probability of default.

JEL Classification: G32

Suggested Citation

Singh, Rajdeep and Gibson, George Scott, Using Put Warrants to Reduce Corporate Financing Costs. EFMA 2002 London Meetings. Available at SSRN: https://ssrn.com/abstract=238892 or http://dx.doi.org/10.2139/ssrn.238892

Rajdeep Singh (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-1061 (Phone)
612-626-1335 (Fax)

HOME PAGE: http://umn.edu/~rajsingh

George Scott Gibson

College of William and Mary - Mason School of Business ( email )

P.O. Box 8795
Williamsburg, VA 23187-8795
United States
757/221-1673 (Phone)

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