Determinants of Contract Choice: The Use of Warrants to Compensate Underwriters of Seasoned Equity Issues

Posted: 11 Mar 1996 Last revised: 9 Oct 2008

See all articles by Chee K. Ng

Chee K. Ng

Fairleigh-Dickinson University - Silberman College of Business

Richard L. Smith

University of California, Riverside - Anderson Graduate School of Management

Abstract

The issuer's dichotomous choice to include warrants as underwriting compensation is studied for a sample of 1,991 negotiated firm commitment seasoned equity issues. Using two-stage logit to adjust for self-selection, we find the issuer's decision to use or not use warrants is consistent with the objective of maximizing issue proceeds net of issuing costs, including cash spread, underpricing and the value of warrant compensation. To explain the use ofwarrant compensation, three non-mutually exclusive hypotheses are tested: certification, circumvention, and segmentation. Results suggest that the most important determinant of the choice is certification. The certification hypothesis maintains that warrants substitute for reputation in certifying the fairness of the offer price. Results also are consistent with the hypothesis that warrants can be used as means to circumvent NASD limitations on underwriting compensation. Results are inconsistent with the hypothesis that underwriting market is segmented between small and large issuers.

JEL Classification: D82, G24, L14

Suggested Citation

Ng, Chee K. and Smith, Richard L., Determinants of Contract Choice: The Use of Warrants to Compensate Underwriters of Seasoned Equity Issues. Journal of Finance, Vol. 51, No. 1, March 1996. Available at SSRN: https://ssrn.com/abstract=7265

Chee K. Ng

Fairleigh-Dickinson University - Silberman College of Business ( email )

Madison, NJ 07940
United States
9734438142 (Phone)
9734438377 (Fax)

Richard L. Smith (Contact Author)

University of California, Riverside - Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States
951-827-3554 (Phone)

HOME PAGE: http://www.agsm.ucr.edu/

Register to save articles to
your library

Register

Paper statistics

Abstract Views
871
PlumX Metrics