Knight, Rainford McWhinney.

The purpose of this study is to empirically test a number of hypotheses related to unit initial public offerings. Specifically, the following areas are examined: (1) the underpricing unit IPOs relative to a subset of NASDAQ straight-equity IPOs; (2) the impact of the size and value of the overallotment option on the degree of underpricing and the underwriter percentage spread; (3) the impact of the size and value of the underwriter warrants on the degree of underpricing and the underwriter; (4) certification effects of auditor type and bank and bridge loans; (5) the distribution function of the underwriter; (6) the levels of financing packaged in the unit as a signal of firm quality, as well as, factors affecting the probability of packaging multiple levels of financing; (7) factors influencing the probability that the units offered will be detached into their component securities and (8) factors influencing unit bid-ask spreads. In general, the results indicate that unit IPOs are more underpriced than a similar subset of NASDAQ straight-equity IPOs. The excessive underpricing is reflective of the high degree of uncertainty surrounding these offerings. Also, the findings indicate that the degree of underpricing associated with unit offerings is influenced by the size of the offering, higher prestige unit underwriters and lower aftermarket volatility. Additionally, the value and size of the explicit options (the overallotment option and the underwriter warrants) granted in these offerings do not significantly impact the degree of unit underpricing. Furthermore, the evidence indicates the existence of certification benefits for those unit firms using big six/eight auditors and bank loans. In addition, the results imply that the underpricing of unit issues increases as the distribution effort of the underwriter decreases. Also, those unit firms packaging two levels of financing at the IPO (A and B warrants) seem to have a greater degree of uncertainty in comparison to those firms packaging only a single level of financing (A warrants only). For these firms, the probability of packaging multiple levels of financing is higher if the firm is underwritten on a best efforts basis and insiders retain a larger percentage of voting control. Similarly, the probability of a unit offering being detached into its component securities is greater with higher expected market making costs and a greater perception of firm value by the marketplace. Lastly, adverse information risk is greatest for the warrant component of detachable units. Furthermore, the findings indicate that underwriter stabilization and flipping seem to be infrequent events for the unit component.