ABSTRACT
This chapter analyses theoretically and empirically, the economic effects of a bond cum equity warrant (BW) financing strategy. Between 1992 and 1993 in fact, share prices of several BW issues fell far below the exercise price driven by a bearish japanese stock market. The chapter presents a model that is a refinement and an extension of the J. C. Stein approach. The model shows that, when costs of financial distress are relevant, a BW issue is an intermediate signal for firms having good but risky projects. The signalling model is analysed under two different extensions: the presence of bond rating that partially eliminates imperfect information on firm financial conditions and the existence of stock market fluctuations. The chapter assesses the role of warrants in financing strategies of high-tech firms and provides a rationale for the often observed empirical evidence of the preference of innovating firms for debt plus equity warrant financing issues.
