Warrants in Underwritten IPOs: The Alternative Investment Market (AIM) Experience

We examine the use of warrants as a part of underwriter compensation in IPOs listed on the Alternative Investment Market (AIM) of the London Stock Exchange. Our results show that, though warrant-issuing IPO firms are riskier, they are usually underwritten by reputable underwriters. Firms that are cash constrained at the time of their IPO are more likely to use warrants. Both market volatility and hot issue markets increase the likelihood of firms issuing warrants. We also find that warrant issuers are able to minimise their total costs of going public, even under a very light regulatory setting with regards non-cash compensation. They incur actual costs of 29.1%, but would have incurred greater costs of 33.8% had they not issued warrants to their underwriters. Overall, our results support the cost minimisation explanation of the use of warrants by UK IPO firms.