Current Search: Penny stocks--Rate of return (x)
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Title
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Penny stock IPOs as investments.
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Creator
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Konku, Daniel K., Florida Atlantic University, Wiley, Marilyn
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Abstract/Description
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Researchers of Initial Public Offerings, IPOs, have, traditionally, filtered out low-priced stocks with cut-off prices depending on individual study. This study examines underpricing, short- and long-run performance of one special class of such low-priced stocks. I examine IPOs filed for and issued as Penny Stocks, as defined by the amended SEC Act of 1990. The study finds average first-day excess returns of 128% over a benchmark NASDAQ Decile 1 Index. The excess returns on nonpenny IPOs...
Show moreResearchers of Initial Public Offerings, IPOs, have, traditionally, filtered out low-priced stocks with cut-off prices depending on individual study. This study examines underpricing, short- and long-run performance of one special class of such low-priced stocks. I examine IPOs filed for and issued as Penny Stocks, as defined by the amended SEC Act of 1990. The study finds average first-day excess returns of 128% over a benchmark NASDAQ Decile 1 Index. The excess returns on nonpenny IPOs issued on the same markets as the penny stocks are 7.6% over the S&P 500 Index. Cross-sectional analyses show that lower-priced penny stocks and stocks of smaller firms are more highly underpriced. Consistent with the information asymmetry hypothesis, penny stocks that were issued on the pink sheets are more highly underpriced than those on the more exposed and more regulated environments of the NASDAQ Small Capitalization markets and the OTC markets. The short- and long-run performance analyses show that, in general, penny stocks have a high performance of between 18% to 20% raw returns in the first year of issue but that declines sharply after a 13-month period. I find an 11-month optimal holding period over which an investor could maximize his returns in a portfolio of penny stocks. I further show that a passive buy-and-hold investment in penny stocks held longer than this optimal period can be a poor investment but an actively-managed penny-stock portfolio can outperform comparable benchmark portfolios of various market indexes on both raw and risk-adjusted basis. Penny stock issuers have shifted from public issues to private placement since 2001. I examine the return to investors in these private issues during the lockup period or until those issues eventually end up in the public domain. The average annualized return to investors during the lockup period is 229%, with only 5% of those issues recording negative returns. Investors who bought these stocks immediately after the lockup period, however, experience an 11% drop in value but the trend reversed after about 10 months, indicating a better long-run performance than those initially issued on the public markets. I examine the effect of the Penny Stock Reform Act (1990) on the number of sanctions that were imposed on the penny stock issuers. The policy intervention analysis shows that the number of sanctions dropped by 9% in the immediate aftermath of the enactment of the Act but increased significantly by nearly 4.7% per quarter thereafter.
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Date Issued
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2006
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PURL
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http://purl.flvc.org/fcla/dt/12223
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Subject Headings
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Going public (Securities)--Law and legislation--United States, Portfolio management, Penny stocks--Rate of return, Investment analysis
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Format
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Document (PDF)
