Signalling under intertemporal resolution of uncertainty: Distinguishing debt-with-warrants from similar offerings

This article extends existing static analyses of debt-with-warrants' ability to signal by considering the intertemporal resolution of uncertainty. Provided that managers seek to minimize residual risk while correctly signalling prospects, callable bonds-with-warrants can prove strictly superior to analogous offerings of pure debt or of debt-with-equity. Because our intertemporal structure allows bonds to be called while warrants remain outstanding, these complicated offerings can also be successfully discriminated from convertible bonds. Managers can further accentuate dissipation of residual risk by simultaneously issuing debt-with-warrants and buying down existing equity (through share repurchase or cash dividends).The authors express our appreciation to Charlie Jacklin for discussions concerning this material. Our thanks also go to an anonymous referee atRQFA who helped us to refine our final product.Much of the work for this paper was conducted while Professor Robbins was a Visiting Research Scholar at Stanford GSB.