Underwriter warrants, underwriter reputation, and growth signaling

Underwriter warrants, underwriter reputation, and growth signaling We present an alternative explanation of warrant use for underwriter compensation. We consider underwriter warrants as a signaling device to convey an issuing firm’s future growth potential and test this signaling role of warrant use by taking a direct approach in a seasoned equity offering (SEO) environment. Employing a matched-sample approach, we find that the use of warrants mitigates the negative price effects of SEOs. Specifically, the issuance of SEOs with warrant-based compensation has a significantly less negative impact on abnormal return performance than the issuance of SEOs with cash-based compensation. The results of logit regressions confirm this linkage. We further find that this less negative impact on firm value is attributable to the signaling value representing the issuing firm’s future growth prospects through warrant compensation even in the presence of underwriter reputation variables. These results suggest that firms with greater growth prospects benefit more by issuing SEOs with warrant compensation than with cash compensation. Overall, our results support the growth signaling effect of warrant compensation as an additional role of underwriter warrants in the SEO market. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Underwriter warrants, underwriter reputation, and growth signaling

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Publisher
Springer US
Copyright
Copyright © 2007 by Springer Science+Business Media, LLC
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-007-0030-2
Publisher site
See Article on Publisher Site

Abstract

We present an alternative explanation of warrant use for underwriter compensation. We consider underwriter warrants as a signaling device to convey an issuing firm’s future growth potential and test this signaling role of warrant use by taking a direct approach in a seasoned equity offering (SEO) environment. Employing a matched-sample approach, we find that the use of warrants mitigates the negative price effects of SEOs. Specifically, the issuance of SEOs with warrant-based compensation has a significantly less negative impact on abnormal return performance than the issuance of SEOs with cash-based compensation. The results of logit regressions confirm this linkage. We further find that this less negative impact on firm value is attributable to the signaling value representing the issuing firm’s future growth prospects through warrant compensation even in the presence of underwriter reputation variables. These results suggest that firms with greater growth prospects benefit more by issuing SEOs with warrant compensation than with cash compensation. Overall, our results support the growth signaling effect of warrant compensation as an additional role of underwriter warrants in the SEO market.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Jul 26, 2007

References

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