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Further Evidence on Short-Run Results for New Issue Investors

Published online by Cambridge University Press:  19 October 2009

Frank K. Reilly
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Extract

In a recent article, Professors Stoll and Curley (hereinafter referred to as S–C) examined results for new issues during a short-run period and over long-run periods. The authors concluded that, “investors in new small issues floated under Regulation A in 1957, 1959, and 1963 experienced lower long-run rates of return than if they had invested in a portfolio of large stocks represented by the Standard and Poor's Industrial Average.” It was pointed out that these long-run results were consistent with the results of similar studies. Alternatively, regarding short-run results it was concluded that “in the short run, the stocks in the sample showed a remarkable price appreciation.” In fact, “short-run price appreciation was, however, considerably greater than the index appreciation.” They refer to this short-run performance as “.… perhaps the most interesting and certainly the most puzzling phenomenon encountered in the study.”

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 8 , Issue 1 , January 1973 , pp. 83 - 90
Copyright
Copyright © School of Business Administration, University of Washington 1973

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References

1 Stoll, Hans R. and Curley, Anthony J., “Small Business and the New Issues Market for Equities,” Journal of Financial and Quantitative Analysis, vol. 5 (September 1970), pp. 309–322CrossRefGoogle Scholar.

2 The short run was defined as the first year after the offering.

3 Reilly, Frank K. and Hatfield, Kenneth, “Investor Experience with New Stock Issues,” Financial Analysts Journal, vol. 25 (September–October 1969), pp. 73–80CrossRefGoogle Scholar.

4 An examination of short-run price changes is contained in Reilly, Frank K., “Evidence Regarding a Segmented Stock Market,” Journal of Finance, vol. 27 (June 1972), pp. 607–625Google Scholar. Long-run price change differences are examined in Reilli, Frank K. “Price Changes in NYSE, AMEX and OTC Stocks Compared,” Financial Analysts Journal, vol. 27 (March–April 1971), pp. 54–59Google Scholar.

5 A somewhat similar case is encountered in Van Horne, James C., “New Listings and Their Price Behavior,” Journal of Finance, vol. 25 (September 1970), pp. 783–794CrossRefGoogle Scholar. Van Home points out the bias in his comparison between price changes for stocks prior to being listed (OTC stocks) and price changes for Standard and Poor's industry indexes that are all NYSE stocks.

6 See Hays, W.L. and Winkler, R.L., Statistics: Probability, Inference, and Decision, vol. 1 (New York: Holt, Rinehart and Winston, Inc., 1970), pp. 152–155Google Scholar.

7 For a discussion of the Pearsonian measure of skewness see, Chou, Ya-lun, Statistical Analysis (New York: Holt, Rinehart and Winston, Inc., 1969), pp. 108–109Google Scholar.

8 Reilly, Frank K., “Performance of New Stock Issues During a Declining Stock Market,” Working Paper No. 33, University of Kansas, School of Business (July 1970)Google Scholar.

9 In some cases the coefficient of variation was greater for the randomly selected stocks. This was due not to greater variance but to the substantially lower mean price change.

10 For an extensive discussion of efficient markets and alternative tests see Fama, Eugene F., “Efficient Capital Markets: A Review of Theory and Empirical Work,” Journal of Finance, vol. 25 (May 1970), pp. 383–417Google Scholar. These results are also somewhat consistent with results of a recent study by McDonald, J.G. and Fisher, A.K., “New-Issue Stock Price Behavior,” Journal of Finance, vol. 27 (March 1972), pp. 97–102.Google Scholar