Shares vs. Warrant-Share Units: Evidence from Seasoned Equity Offerings
Posted: 5 Apr 2003
We examine seasoned offerings of common stock and stock-warrant units to test predictions of recent theories of security issuance based on sequential financing and information signaling. We specify and test a simultaneous equations model involving the choice of shares versus stock-warrant units and announcement period abnormal return equations for shares and units. Consistent with theoretical predictions of the signaling hypothesis, we find that smaller issues made by young and risky firms are more likely to issue stock-warrant units in seasoned offerings. Also, consistent with the signaling hypothesis but not with the sequential financing hypothesis, firms with greater managerial ownership are more likely to issue units. We also find that firms that include warrants in their stock offerings experience a higher average abnormal return than if they had issued shares alone. We report further evidence consistent with the implications of the signaling hypothesis regarding underpricing, riskiness and insider ownership. Thus while sequential financing and signaling explanations find support in our tests, the signaling hypothesis arises as the more complete explanation for stock-warrant unit financing.
Keywords: Unit offering, signaling, agency cost, warrant
JEL Classification: G32
Suggested Citation: Suggested Citation