An empirical study of unit IPOS in the UK: why do firms include warrants in initial public offerings?

The main objective of this thesis is to identify the reasons why firms choose to issue unit IPOs instead of share-only IPOs. Evidence is found that unit firms are smaller, riskier, with higher level of agency costs and higher levels of information asymmetry than share-only firms and unit IPOs are underwritten by less reputable underwriters. The initial return results provide strong support to the Agency Cost hypothesis that unit IPOs is significantly more underpriced than share-only IPOs. Unit firms have lower survival rate than that of share-only IPO firms; however, unit firms that do survive are more likely to issue seasoned equity offerings (SEOs) for further funding. A clear pattern of price run-up is observed before SEO announcements by unit firms and a significant negative price adjustment is found when the SEOs are announced. In the long-term, this thesis provides evidence that unit IPOs present significantly worse underperformance comparing to both the matching share-only IPOs and various market indices. Such results contradict both the Agency Cost and the Signalling hypotheses and imply that unit firms cannot significantly improve performance by simply attaching warrants, regardless as whether they are used to reduce agency costs or to signal firm value.