Unit initial public offerings: stages equity or signaling mechanism?

Blackwell Publishing
Publication Type:
Journal Article
Accounting and Finance, 2003, 43 (1), pp. 63 - 85
Issue Date:
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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 agencycost 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 Schultzs agency cost explanation, other results we report are not. We find no difference in underpricing etween unit IPOs and other IPO firms, nor are there any significant differences in the planned uses of proceeds reported in the prospectus, postlisting 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.
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