Security Choice and Corporate Governance


  • We thank an anonymous referee, John Doukas (the editor), WD Allen, Paul Brockman, Doug Cook, Steve Ferris, Tim Jenkinson, Andy Puckett, Chris Wikle, session participants at the 2006 FMA annual meeting and the 2008 EFM IPO Symposium for their helpful comments; and Andrew Lynch and Matt Crook for their research assistance.


The most efficient corporate governance structure will vary by firm depending on the costs and benefits of different governance mechanisms. For IPO firms, warrants might act as a substitute for other governance mechanisms (Schultz, 1993). Alternatively, warrants might serve as a signal of high quality, and thus effectively governed, firms (Chemmanur and Fulghieri, 1997), in which case they would act as a complement to other governance mechanisms. We test these competing hypotheses by examining a sample of unit IPO firms (firms issuing warrants with shares) matched to a comparable sample of shares-only firms and show that warrants act as a substitute for other governance mechanisms. The research is also of interest because it shows an interaction between the financing decisions of firms and their corporate governance that has not been documented previously.