Underwriter warrants, underwriter compensation, and the costs of going public

Barry, Christopher B.; Muscarella, Chris J.; Vetsuypens, Michael R.

doi:10.1016/0304-405x(91)90016-d

Cited by 105 publications

(101 citation statements)

References 20 publications

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“…This means that, whenever underwriters bring risky issues to the market, they include warrants in their compensation, instead of charging the issuers a high cash fee that would violate/exceed NASD guidelines. In addition, Barry et al (1991) provide evidence that the total costs of going public are significantly higher for their warrant-issuing IPO sample than for their no-warrant sample, and these costs can be as much as 30% of the gross proceeds of the offering.…”

Section: Related Literature and Research Questionsmentioning

confidence: 95%

“…Prior evidence from the US shows that risky firms are more likely to use warrants (Barry et al, 1991) in order to provide extra compensation to their underwriters. We wish to test whether this is also the case in other markets such as the UK.…”

Section: Related Literature and Research Questionsmentioning

confidence: 99%

“…There are three main explanations that have been suggested in the literature to explain the issuance of warrants to underwriters as part of their compensation package: the circumvention hypothesis (Barry et al, 1991), the cost minimisation hypothesis (Dunbar, 1995) and the certification hypothesis (Ng and Smith, 1996). 3 The circumvention hypothesis 2 An investigation by the Office of Fair Trading, the UK's consumer and competition authority, into the underwriting fees of rights issues in the UK found that there had been a significant increase in the fees since the onset of the 2007-09 financial crisis.…”

Section: Related Literature and Research Questionsmentioning

confidence: 99%

“…Prior research, which is mainly on the US markets, provides different explanations for the use of warrants by IPO firms. For example, Barry, Muscarella and Vetsuypens (1991) argue that warrants are used by issuers to circumvent otherwise binding regulatory constraints on the amount of compensation that can be paid to underwriters. Dunbar (1995) shows that IPO firms use warrants in order to minimise their costs of going public.…”

Section: Introductionmentioning

confidence: 99%

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Warrants in underwritten IPOs: The Alternative Investment Market (AIM) experience

Khurshed

Kostas

Saadouni

2016

Journal of Corporate Finance

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We examine the use of warrants as a part of underwriter compensation in IPOs listed on the Alternative Investment Market (AIM) of the London Stock Exchange. Our results show that, though warrant-issuing IPO firms are riskier, they are usually underwritten by reputable underwriters. Firms that are cash constrained at the time of their IPO are more likely to use warrants. Both market volatility and hot issue markets increase the likelihood of firms issuing warrants. We also find that warrant issuers are able to minimise their total costs of going public, even under a very light regulatory setting with regards non-cash compensation. They incur actual costs of 29.1%, but would have incurred greater costs of 33.8% had they not issued warrants to their underwriters. Overall, our results support the cost minimisation explanation of the use of warrants by UK IPO firms.

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Section: Related Literature and Research Questionsmentioning

confidence: 95%

Section: Related Literature and Research Questionsmentioning

confidence: 99%

Section: Related Literature and Research Questionsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Warrants in underwritten IPOs: The Alternative Investment Market (AIM) experience

Khurshed

Kostas

Saadouni

2016

Journal of Corporate Finance

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“…For warrants, see Barry, Muscarella, and Vetsuypens (1991). 7 Ausubel and Cramton (1998) recognize underwriters' power in the securities market and state that the failure to adopt an auction style system for the IPO is due to institutional inertia resulting from underwriters defending vested interests.…”

mentioning

confidence: 99%

IPO share allocation and conflicts of interest

Kojima

2006

Annals of Finance

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The underwriter of an IPO has two sources of compensation for its services on behalf of the issuer. One is through a commission (spread), the other is by buying issued shares for itself (or its affiliates) and reselling them in the post-issue market.Profits from the former decrease along with the magnitude of underpricing while profits from the latter increase with it. Faced with these countervailing interests, the present paper analyzes how the underwriter decides upon the pricing and allocation of IPOs.JEL Classification: G20, D82, D40 * The author is thankful to John Bennett, Bryan Mase and Jean-Charles Rochet. The paper owes a lot to the referee whose detailed comments have significantly improved the exposition.

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The Choice between Firm-Commitment and Best-Efforts Offering Methods in IPOs: The Effect of Unsuccessful Offers

Dunbar

1998

Journal of Financial Intermediation

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Underwriter warrants, underwriter compensation, and the costs of going public

Cited by 105 publications

References 20 publications

Warrants in underwritten IPOs: The Alternative Investment Market (AIM) experience

Warrants in underwritten IPOs: The Alternative Investment Market (AIM) experience

IPO share allocation and conflicts of interest

The Choice between Firm-Commitment and Best-Efforts Offering Methods in IPOs: The Effect of Unsuccessful Offers

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