Unit initial public offerings: Staged equity or signaling mechanism?

Abstract

We investigate the use of unit (i.e., package) initial public offerings by Australian industrial firms and conclude that their use reflects their role as a signaling mechanism (Chemmanur and Fulghieri, 1997), as distinct from the agency-cost explanation offered by Schultz (1993). From a sample of 394 IPOs between 1976 and 1994, the 66 firms making unit offerings are typically riskier, use less prestigious underwriters and have a lower level of retained ownership than other IPO firms. While these results are also consistent with Schultz's agency cost explanation, other results we report are not. We find no difference in underpricing between unit IPOs and other IPO firms, nor are there any significant differences in the planned uses of proceeds reported in the prospectus, post-listing failure rates or secondary equity offerings of the type predicted by Schultz. We do however, report evidence consistent with a prediction unique to the signaling explanation. After controlling for the level of ownership retained by insiders, the proportion of firm value sold as warrants is increasing in IPO firms' riskiness.

Why do companies include warrants in seasoned equity offerings?

“…In particular, they find that unit issuers are riskier than non-unit issuers, underpricing increases with firm riskiness, and that, after controlling for the fraction of equity retained by insiders, the proportion of the firm sold as warrants increases with firm riskiness. Lee et al (2003) find similar results for Australian IPOs and Jain (1994) for US IPOs. Byoun and Moore's (2003) results also support signalling predictions for US SEOs.…”

“…Schultz (1993) also finds that firms issuing unit IPOs are more risky as they are far more likely to fail than those issuing shares alone. However, Jain (1994), Lee et al (2003) and How and Howe (2001) find that the probability of failure is independent of whether the IPO is a unit or not for firms of similar characteristics. Since these agency concepts are also likely to apply to seasoned equity offerings, we expect firms with high potential agency conflicts to issue units.…”

Waran pada Initial Public Offerings di Pasar Modal Indonesia

“…Kajian Lee et al (2003), di pasar modal Australia, menunjukkan terdapatnya kecenderungan WIPO dilakukan oleh perusahaan yang lebih berisiko, memiliki kepemilikan insider yang lebih rendah, serta dijamin oleh underwriter bereputasi rendah. Temuan penelitian tersebut cukup berbeda dengan kajian How dan Howe (2001), yang menyimpulkan bahwa teori sinyal lebih dapat menjelaskan fenomena WIPO di pasar modal Australia.…”

Security Design in Initial Public Offerings

“…This is because some uncertainty remains about the portion of firm value that belongs to equity holders in the low states of the world, since the firm may not be bankrupt in all such states. Lee, Lee and Taylor (2003) and Howe and Olsen (2006) provide evidence that indeed unit IPOs are used by firms with less outstanding debt than regular IPOs.…”

“…For example, the use of warrants in IPOs is also prevalent in Israel (Hauser and Levy, 1996;Kandel, Sarig and Wohl, 1999) and Australia (How and Howe, 2001;Lee, Lee and Taylor, 2003).…”