Issue Day Effects for Common Stock Offerings: Causes and Consequences

Abstract

We examine the behavior of stock prices and trading activity around the issue day of seasoned common stock offerings. We find a distinct V-shaped pattern in prices, which decline before the issue and then rise following it. These price changes are nontrivial, especially for over-the-counter firms. We investigate three hypotheses that might explain this issue period effect. The first hypothesis suggests that investors interpret the willingness of more informed managers to proceed with the offer as a signal that the stock is still overvalued and lower the price accordingly. The second claims that short sellers drive prices down before the issue day so that firms "underprice" the issue. Finally, the third proposes that order flow imbalances cause measurement error in the price series we observe, giving the false impression that prices fall on the issue day. Examining a large sample of issues across all markets, we find the data are most supportive of the shorting story. A rule adopted by the SEC in 1988 that was designed to reduce short-selling pressure appears to have had the intended effect, but also some unintended consequences.

JEL Classification: G14, G18, G24, G32