Settlement Delays and Stock Prices

Economic Review, Vol. 25, 1989

10 Pages Posted: 7 Apr 2003

See all articles by Ramon P. DeGennaro

Ramon P. DeGennaro

University of Tennessee, Knoxville - Department of Finance


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.

JEL Classification: G1, G2

Suggested Citation

DeGennaro, Ramon P., Settlement Delays and Stock Prices. Economic Review, Vol. 25, 1989, Available at SSRN: or

Ramon P. DeGennaro (Contact Author)

University of Tennessee, Knoxville - Department of Finance ( email )

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Knoxville, TN 37996
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