The choice of equity financing: Floating-priced warrants versus SEOs

Abstract

A floating-priced warrant (FPW) is an American warrant with a resettable exercise price at a discount from the market price. FPWs are frequently issued by Japanese firms as an alternative equity financing method to seasoned equity offerings (SEOs). This study reveals what kind of firms prefer to issue FPWs rather than SEOs and why. The results reveal that issuers of FPWs are poor performers and have higher levels of information asymmetry compared to issuers of SEOs. Such firms will face higher flotation costs when issuing common stocks directly. However, the flotation costs of selling equity via FPWs are relatively fixed and irrelevant to the issuer's firm characteristics. Although the average flotation cost of FPWs is higher than that of SEOs, issuers of FPWs would face an even higher flotation cost had they conducted SEOs instead. The result supports the flotation cost minimization hypothesis as a motive for issuing FPWs.