THE USE OF WARRANTS AS UNDERWRITER COMPENSATION IN INITIAL PUBLIC OFFERINGS

Previous research suggests that offering costs are higher when warrant s are used to compensate underwriters. This finding potentially arises from a failure to account for self-selection in estimating offering c ost relations. Using methods that account for self-selection, I find t hat underpricing and total offering costs are reduced for firms using warrants as underwriter compensation, consistent with the hypothesis t hat issuers choose compensation contracts which minimize costs.