Why Include Warrants in New Equity Issues? A Theory of Unit Ipos

J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, March 1997

Posted: 17 Feb 1997

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Paolo Fulghieri

University of North Carolina Kenan-Flagler Business School; European Corporate Governance Institute (ECGI)

Abstract

We develop a theory of unit IPOs, in which the firm going public issues a package of equity with warrants. We model an equity market where insiders have private information about the riskiness as well as the expected value of their firm's future cash flows. We demonstrate that, in equilibrium, high risk firms issue underpriced "units" of equity and warrants; lower risk firms, on the other hand, issue underpriced equity alone. In contrast to the existing literature, underpricing arises as a signal in our model in the context of a one-shot equity offering. Though developed in the context of IPOs, our model can also explain the issuance of seasoned equity offerings packaged with warrants. Further, the intuition behind the model generalizes readily to provide a new rationale for packaging call option like claims with risky securities other than equity (e.g., convertible debt, debt with warrants) as well.

JEL Classification: G39

Suggested Citation

Chemmanur, Thomas J. and Fulghieri, Paolo, Why Include Warrants in New Equity Issues? A Theory of Unit Ipos. J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, March 1997. Available at SSRN: https://ssrn.com/abstract=8116

Thomas J. Chemmanur (Contact Author)

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Paolo Fulghieri

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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