Signaling role of underwriter warrants: evidence from U.S. seasoned equity offerings

Abstract

Options in the form of warrants are often granted to underwriters as whole or additional compensation for their underwriting services in the capital raising process. This paper investigates the potentia l signaling role of underwriter warrants by examining the wealth effect of warrant-based compensation package relative to cash-based compensation package. Employing U.S. seasoned equity offering data, we find that the issuance of seasoned new equity using warrant-based compensation has a less negative impact on stockholder wealth than the issuance of seasoned new equity using cash-based compensation. These results indicate that structuring an issuance with warrant-based compensation translates into a lower cost of new equity capita l for the issuing firm and signals positive information regarding the firm's future prospects. Further empirical analysis confirms this linkage that a greater shareholder wealth protection is associated with firms characterized by higher-than-expected future growth prospects even with the presence of underwriter certification variables. Overall, our results provide evidence supporting the signaling role of warrant-based compensation as an additional role of underwriter warrants in the seasoned equity environment.