Impact of the Penny Stock Reform Act of 1990 on the IPO Market

Posted: 9 Oct 2003

See all articles by Randolph P. Beatty

Randolph P. Beatty

University of Southern California - Leventhal School of Accounting

Padma Kadiyala

Pace University - Lubin School of Business

Abstract

The Penny Stock Reform Act of 1990 (PSRA) was an attempt to curb fraudulent security issues by placing severe restrictions on initial public offerings (IPOs) that were priced below $5. The regulation had the cosmetic effect of reducing the number of IPOs priced below $5, but had no substantive impact on issuer quality. Delisting risk, which is a measure of issuer quality, did not decline significantly in the post-PSRA period. Instead, abnormal returns earned by a portfolio of non-penny stocks declined significantly in the post-PSRA period. We present evidence that attributes the decline in abnormal returns to migration of speculative issuers into the non-penny range.

Keywords: Law and Finance, IPOs, regulation, Information Asymmetry

JEL Classification: G280, G180, K22

Suggested Citation

Beatty, Randolph P. and Kadiyala, Padma, Impact of the Penny Stock Reform Act of 1990 on the IPO Market. Journal of Law & Economics, Forthcoming, Pace University Finance Research Paper No. 2003/02, Available at SSRN: https://ssrn.com/abstract=431201

Randolph P. Beatty

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-4838 (Phone)

Padma Kadiyala (Contact Author)

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States
914-773-3620 (Phone)

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