Units of debt with warrants: evidence of the ‘penalty-free’ issuance of an equity-like security

Units of debt with warrants: evidence of the ‘penalty-free’ issuance of an equity-like security

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Article ID: iaor201523011
Volume: 13
Issue: 3
Start Page Number: 187
End Page Number: 199
Publication Date: Sep 1990
Journal: Journal of Financial Research
Authors: , ,
Keywords: investment
Abstract:

While units of debt with warrants are not structured as perfect substitutes for convertible bonds, there is reason to believe that firms view the two securities as viable alternative methods of raising funds. Analyses of the capital market effects of the announcement of the plan to issue and the issuance of units of debt with warrants provide unique evidence of the ‘penalty‐free’ issuance of an equity‐like security. Evidence is found to support the conjecture that units are typically issued by smaller, riskier firms than are convertible bonds. However, there is no evidence that the use of this security is interpreted by the market as a sign of financial distress.

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