IDEAS home Printed from https://ideas.repec.org/a/ucp/jlawec/y2003v46i2p517-41.html
   My bibliography  Save this article

Impact of the Penny Stock Reform Act of 1990 on the Initial Public Offering Market

Author

Listed:
  • Beatty, Randolph
  • Kadiyala, Padma

Abstract

The Penny Stock Reform Act of 1990 (PSRA) was an attempt to curb fraudulent security issues by placing severe restrictions on initial public offerings that were priced below $5. The regulation had the cosmetic effect of reducing the number of initial public offerings priced below $5 but had no substantive impact on issuer quality. Delisting risk, which is a measure of issuer quality, did not decline significantly in the post-PSRA period. Instead, abnormal returns earned by a portfolio of nonpenny stocks declined significantly in the post-PSRA period. We present evidence that attributes the decline in abnormal returns to the migration of speculative issuers into the nonpenny range.

Suggested Citation

  • Beatty, Randolph & Kadiyala, Padma, 2003. "Impact of the Penny Stock Reform Act of 1990 on the Initial Public Offering Market," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 517-541, October.
    • Handle: RePEc:ucp:jlawec:y:2003:v:46:i:2:p:517-41
    DOI: 10.1086/380387
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/380387
    Download Restriction: Access to the online full text or PDF requires a subscription.
    File URL: https://libkey.io/10.1086/380387?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Beatty, Randolph P. & Ritter, Jay R., 1986. "Investment banking, reputation, and the underpricing of initial public offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 213-232.
    2. Maksimovic, Vojislav & Unal, Haluk, 1993. "Issue Size Choice and "Underpricing" in Thrift Mutual-to-Stock Conversions," Journal of Finance, American Finance Association, vol. 48(5), pages 1659-1692, December.
    3. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    4. repec:bla:jfinan:v:53:y:1998:i:1:p:285-311 is not listed on IDEAS
    5. Dunbar, Craig G., 2000. "Factors affecting investment bank initial public offering market share," Journal of Financial Economics, Elsevier, vol. 55(1), pages 3-41, January.
    6. Carter, Richard B & Manaster, Steven, 1990. "Initial Public Offerings and Underwriter Reputation," Journal of Finance, American Finance Association, vol. 45(4), pages 1045-1067, September.
    7. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    8. George, Thomas J & Kaul, Gautam & Nimalendran, M, 1991. "Estimation of the Bid-Ask Spread and Its Components: A New Approach," The Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 623-656.
    9. Seguin, P. J. & Smoller, M. M., 1997. "Share price and mortality: An empirical evaluation of newly listed Nasdaq stocks," Journal of Financial Economics, Elsevier, vol. 45(3), pages 333-363, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. He, Ping & Ma, Lin & Wang, Kun & Xiao, Xing, 2019. "IPO pricing deregulation and corporate governance: Theory and evidence from Chinese public firms," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
    2. Daniel J. Bradley & John W. Cooney, Jr. & Steven D. Dolvin & Bradford D. Jordan, 2006. "Penny Stock IPOs," Financial Management, Financial Management Association, vol. 35(1), Spring.
      • Daniel J. Bradley & John W. Cooney Jr. & Steven D. Dolvin & Bradford D. Jordan, 2006. "Penny Stock IPOs," Financial Management, Financial Management Association International, vol. 35(1), pages 5-29, March.
    3. Carter, Richard B. & Dark, Frederick H. & Sapp, Travis R.A., 2010. "Underwriter reputation and IPO issuer alignment 1981-2005," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(4), pages 443-455, November.
    4. Cécile Carpentier & Douglas Cumming & Jean‐Marc Suret, 2012. "The Value of Capital Market Regulation: IPOs Versus Reverse Mergers," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 9(1), pages 56-91, March.
    5. Cumming, Douglas & Haß, Lars Helge & Schweizer, Denis, 2014. "The fast track IPO – Success factors for taking firms public with SPACs," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 198-213.
    6. ap Gwilym, O. & Kita, A. & Wang, Q., 2014. "Speculate against speculative demand," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 212-221.
    7. Cécile Carpentier & Douglas Cumming & Jean-Marc Suret, 2010. "The Valuation Effect of Listing Requirements: An Analysis of Venture Capital-Backed IPOs," CIRANO Working Papers 2010s-01, CIRANO.
    8. S. M. Locke & Kartick Gupta, 2009. "The return to initial public offerings: a Sino-Indian comparison," Venture Capital, Taylor & Francis Journals, vol. 11(3), pages 255-277, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Elizabeth Demers & Philip Joos, 2007. "IPO Failure Risk," Journal of Accounting Research, Wiley Blackwell, vol. 45(2), pages 333-371, May.
    2. Nilabhra Bhattacharya & Elizabeth Demers & Philip Joos, 2010. "The Relevance of Accounting Information in a Stock Market Bubble: Evidence from Internet IPOs," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(3‐4), pages 291-321, April.
    3. Agathee, Ushad Subadar & Sannassee, Raja Vinesh & Brooks, Chris, 2012. "The underpricing of IPOs on the Stock Exchange of Mauritius," Research in International Business and Finance, Elsevier, vol. 26(2), pages 281-303.
    4. Cagle, Julie A. B. & Porter, Gary E., 1997. "Conversions of mutual savings institutions: Do initial returns from these IPOS provide investors with windfall profits?," Financial Services Review, Elsevier, vol. 6(2), pages 141-150.
    5. Bayley, Luke & Lee, Philip J. & Walter, Terry S., 2006. "IPO flipping in Australia: cross-sectional explanations," Pacific-Basin Finance Journal, Elsevier, vol. 14(4), pages 327-348, September.
    6. Dominic Gasbarro & Sunil Bundoo & J. Kenton Zumwalt, 2003. "Underpricing and Aftermarket Performance of IPO Firms in Mauritius," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 2(3), pages 315-335, September.
    7. Jay R. Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," Journal of Finance, American Finance Association, vol. 57(4), pages 1795-1828, August.
    8. Krigman, Laurie & Shaw, Wayne H. & Womack, Kent L., 2001. "Why do firms switch underwriters?," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 245-284, May.
    9. Oehler, Andreas & Rummer, Marco & Smith, Peter N., 2004. "IPO Pricing and the Relative Importance of Investor Sentiment: Evidence from Germany," Discussion Papers 26, University of Bamberg, Chair of Finance.
    10. Reena Aggarwal & Nagpurnanand R. Prabhala & Manju Puri, 2002. "Institutional Allocation in Initial Public Offerings: Empirical Evidence," Journal of Finance, American Finance Association, vol. 57(3), pages 1421-1442, June.
    11. Huang, Rongbing & Shangguan, Zhaoyun & Zhang, Donghang, 2008. "The networking function of investment banks: Evidence from private investments in public equity," Journal of Corporate Finance, Elsevier, vol. 14(5), pages 738-752, December.
    12. Kedar Kulkarni & Tarun Sabarwal, 2007. "To what extent are investment bank-differentiating factors relevant for firms floating moderate-sized IPOs?," Annals of Finance, Springer, vol. 3(3), pages 297-327, July.
    13. Willenborg, Michael & McKeown, J.C.James C., 2000. "Going-concern initial public offerings," Journal of Accounting and Economics, Elsevier, vol. 30(3), pages 279-313, December.
    14. Michelle Lowry & G. William Schwert, 2002. "IPO Market Cycles: Bubbles or Sequential Learning?," Journal of Finance, American Finance Association, vol. 57(3), pages 1171-1200, June.
    15. Georgina Benou & Kimberly C. Gleason & Jeff Madura, 2007. "Impact of Visibility and Investment Advisor Credibility on the Valuation Effects of High‐Tech Cross‐Border Acquisitions," Financial Management, Financial Management Association International, vol. 36(1), pages 69-89, March.
    16. Nancy D. Ursel, 2006. "Rights Offerings and Corporate Financial Condition," Financial Management, Financial Management Association International, vol. 35(1), pages 31-52, March.
    17. Lin, Hui Ling & Pukthuanthong, Kuntara & Walker, Thomas John, 2013. "An international look at the lawsuit avoidance hypothesis of IPO underpricing," Journal of Corporate Finance, Elsevier, vol. 19(C), pages 56-77.
    18. Jeppsson, Hans, 2018. "Initial public offerings, subscription precommitments and venture capital participation," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 650-668.
    19. Dimovski, William & Brooks, Robert, 2008. "The underpricing of gold mining initial public offerings," Research in International Business and Finance, Elsevier, vol. 22(1), pages 1-16, January.
    20. James, Kieran E. & How, Janice C. Y. & Izan, H. Y., 1995. "An analysis of the pricing processes of Australian unit trust IPOs," Pacific-Basin Finance Journal, Elsevier, vol. 3(2-3), pages 285-301, July.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucp:jlawec:y:2003:v:46:i:2:p:517-41. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Journals Division (email available below). General contact details of provider: https://www.journals.uchicago.edu/JLE .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.