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Warrants in Initial Public Offerings: Empirical Evidence

We investigate why firms include warrants in their initial public offerings (IPOs). We use a data set of Australian IPOs to examine two hypotheses about the inclusion of warrants in an IPO. The agency-cost hypothesis emphasizes the need for sequential financing for relatively young firms, because sequential financing reduces the opportunities for managers to squander money on unprofitable projects. The signaling hypothesis focuses on the choice of securities as a signaling mechanism in a market characterized by information asymmetry. The evidence favors the signaling hypothesis, thus contributing to our understanding of the types of securities issued by firms. Copyright 2001 by University of Chicago Press.