Settlement Delays and Stock Prices

Ramon P. DeGennaro

University of Tennessee, Knoxville - Department of Finance

Economic Review, Vol. 25, 1989

This paper shows that investors consider delivery procedures in pricing stocks. We model stock returns in two ways. The first uses a function of the length of the settlement delay, while the second uses a function of both the length of the delay and interest rates during the delay. We find that the coefficient on this variable is always correctly signed and statistically significant. This means that observed prices diverge from the prices that would be observed in the absence of this trading mechanism. This, in turn, means that measured returns diverge from true returns.

While this result is comforting to researchers who have assumed that settlement delays are priced, it does have implications for empirical studies using daily stock return data. Since the observed price equals the true price plus a premium to compensate for financing costs, measured returns diverge from true returns if the premium changes during the holding period. This could, for example, affect event studies either by masking the impact of a true economic event or by lending statistical significance to "events" which result only from changes in the premium and not from any underlying economic force.

Number of Pages in PDF File: 10

JEL Classification: G1, G2

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Date posted: April 7, 2003  

Suggested Citation

DeGennaro, Ramon P., Settlement Delays and Stock Prices. Economic Review, Vol. 25, 1989. Available at SSRN: https://ssrn.com/abstract=374100 or http://dx.doi.org/10.2139/ssrn.374100

Contact Information

Ramon P. DeGennaro (Contact Author)
University of Tennessee, Knoxville - Department of Finance ( email )
423 Stokely Management Center
Knoxville, TN 37996
United States
865-974-1726 (Phone)
865-974-1716 (Fax)
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