Abstract
AbstractUnits consist of shares and warrants. Some firms issue units in initial public offerings (IPOs) after which warrant holders can exercise warrants and purchase shares from the issuer. Why do firms choose to issue units instead of only shares? I answer this question based on Merton's investor recognition model. Firms lacking pre‐IPO publicity can benefit from an increase in investor recognition. I find that unit firms have less pre‐IPO publicity than share‐only firms. Separate trading between warrants and shares and eventual exercise of the warrants will increase the number of shareholders and therefore firm value.
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