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Investing in New Intrastate Issues of Common Stock
Published online by Cambridge University Press: 19 October 2009
Extract
Increasing emphasis on performance by the investment community has stimulated many innovations for accomplishing capital gains. Attention has been refocused on an established medium for this growth — investing in the new issue. Historically in and out of favor with security buyers, this particular type of investment has recently been enjoying unprecedented popularity.
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- Investment Market Policy
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- Copyright © School of Business Administration, University of Washington 1970
References
1 SEC, News Digest, July 2, 1969.
2 Reg A offerings are $300 thousand or less. This exemption permits many issues which would otherwise be impractical due to the time and costs required for a full registration under the Securities Act of 1933. SEC notification of the proposed issue is still required, however.
3 For example, see: Friend, Irwin, Longstreet, J. R. et al. , Investment Banking and the New Issue Market (Cleveland: World Publishing Co., 1967)Google Scholar; Greene, M. R. and Neil, Roger J, “Price Movements of New Issues of Common Stock,” Oregon Business Review, April 1968Google Scholar; Reilly, Frank K. and Hatfield, Kenneth, “Investor Experience with New Stock Issues,” Working Paper No. 15 (Lawrence, Kansas: University of Kansas)Google Scholar; and Hans R. Stoll and A. J. Curley, “Small Business and the New Issues Market for Equities,” unpublished manuscript.
4 Growth rates listed were obtained by plotting the data on semilog paper, drawing a line of “visual best fit,” and then calculating the slope.
5 Less than 10 percent of public stock offerings are on an agency or best efforts basis. See the SEC Statistical Bulletin.
6 Less than 20 percent of the Reg A offerings were underwritten in cases studied by Stoll and Curley, op. cit., p. 10.
7 These data were compiled from the Oregon Corporation Division records of the 100 firms that made intrastate offerings in Oregon in 1967 and 1968.
8 Perhaps 50 to 75 percent of Reg A offerings are actually sold; see Stoll and and Curley., op. cit., p. 10. Data for Oregon offerings are unavailable, but a limited survey indicates that the same relative size of gap exists.
9 One example was participation sold in 1967 in a treasure hunting venture on the Oregon Coast.
10 Most larger brokerage firms will not be involved with issues that are sold to Oregon residents only because of the liability exposure to provisions in the Securities Act of 1933.
11 The “first offering” restriction excludes only a few firms and provides a group consisting mainly of newly organized businesses.
12 Arithmetic averages are used throughout this study because they are felt to be appropriate measures of investor experience. Medians are also calculated to minimize the effects of extreme values. Geometric averages are not presented.
13 Additional groupings would refine this observation. For example, a category of ≤ $500,000 had average price increases slightly more than the offerings over $1 million. Best performance was achieved by issues of $500,000 to $1 million, inclusive.
14 Analysis of additional factors such as ownership of stock and fundamentals such as the firm's sales and earnings are beyond the scope of this paper.
15 furthermore, aftermarkets are usually quite thin, and large orders could substantially affect the prices.
16 These data appear in the Thursday editions and include “… most companies that have gone public… ”
17 This study includes data through June 30, 1969, so the 12-month history for the 365 issues brought out in the last half of 1968 was not available. There may have been an upward bias introduced by analyzing only those price quotes that were available. Some stocks probably declined and went into obscurity; on the other hand, trading might have been suspended in some issues that had risen very rapidly. Although the amount and direction of bias is unknown, it is felt that it does not invalidate the conclusions reached in this study.
18 Prices were adjusted for stock dividends of 10 percent or more.
19 With 65 times more observations in the National category, direct comparisons are difficult to make. Also, one popular measure of risk, the standard deviation, does not seem appropriate because of the skewness of the distributions. The author is currently investigating the use of semivariance measurements to quantify risk.
20 Average price increase in the group of National offerings that went up in the first month was 135 percent one year after the offer date.
21 From January 2, 1967 to June 27, 1969, the Dow Jones Industrial Average, American Stock Exchange Index, and the National Quotation Bureau Index rose 11, 103, and 70 percent, respectively.
22 Irwin Friend, J. R. Longstreet, et al., and Hans K. Stoll, A. S. Curley, op. cit., indicate that these new issues do not outperform the outstanding securities in long-run periods.