Financial Contracting and Warrant Structure: Unit IPOs vs. Chapter 11 Reorganizations

Abstract

The type of firms issuing warrants has changed over the last 20 years. In the 1990s, warrants were primarily issued by firms as part of their IPOs. By 2001, firms emerging from chapter 11 bankruptcy issued the majority of warrants. The contract characteristics of the warrants issued in the two situations are different. Warrants issued during chapter 11 have a longer time until expiration, lower dilution levels, higher exercise price to initial price ratio, and are less likely to have provisions that allow managerial control over the warrants. The differences arise from different motivations for the issuance of warrants.