UNDERWRITER WARRANTS, UNDERWRITER COMPENSATION, AND THE COSTS OF GOING PUBLIC

Warrants are sometimes granted to underwriters in initial public offerings as part of the compensation for their services. We examine the effects of underwriter warrants in a sample of firm commitment offerings from 1983 through 1987. These warrants represent a significant component of the compensation to the underwriter and are associated with greater total costs of going public. Warrants appear to provide a mechanism for circumventing otherwise binding regulatory constraints, allowing issuers to offer extra compensation to underwriters marketing especially risky offerings. © 1991.