Why Do Firms Raise Capital with Standalone Warrants: Evidence from Japan

This paper thoroughly examines standalone warrants, a rising financing method in Japan after the 2002 revision of Japanese commercial law. We use seasoned equity offering (SEO) as the frame of reference because standalone warrants can be viewed as an indirect and less certain way of SEO. Because the warrant’s nature differs depending on the exercise price, we divide standalone warrant issues into two groups based on whether the warrant is out of the money at the time of board decision. We find evidence suggests that out of the money warrants are mainly issued to signal undervaluation, and in or at the money warrants are mainly used to signal the management’s type, thereby reducing the expected agency cost of the issuer.