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| Author: | Chemmanur, T. J. Fulghieri, P. |
| Title: | Why include warrants in new equity issues? A theory of unit IPOs |
| Journal: | Journal of Financial and Quantitative Analysis
1997 : MAR, VOL. 32:1, p. 1-24 |
| Index terms: | STOCK MARKETS WARRANTS PUBLIC FINANCE |
| Language: | eng |
| Abstract: | A theory of unit IPOs in which the company going public issues a package of equity with warrants, is developed in this paper. An equity market where insiders have private information about the riskness and the expected value of their company's future cash flows is modelled. It is demonstrated that in equilibrium, high risk companies issue underpriced units of equity and warrants , lower risk firms issue underpriced equity alone. In this model underpricing arises as a signal in the context of a one-shot equity offering. The model can also explain the issuance of seasoned equity offerings packaged with warrants. |
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