Issue Day Effects for Common Stock Offerings: Causes and Consequences

Posted: 20 Dec 1998

See all articles by Claudio F. Loderer

Claudio F. Loderer

University of Berne - Institute for Financial Management; European Corporate Governance Institute (ECGI)

Dennis P. Sheehan

Pennsylvania State University

Gregory B. Kadlec

Virginia Polytechnic Institute & State University - Pamplin College of Business

Date Written: August 1994

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

Suggested Citation

Loderer, Claudio F. and Sheehan, Dennis P. and Kadlec, Gregory B., Issue Day Effects for Common Stock Offerings: Causes and Consequences (August 1994 ). Available at SSRN: https://ssrn.com/abstract=5575

Claudio F. Loderer

University of Berne - Institute for Financial Management ( email )

Engehaldenstrasse 4
Bern, CH-3012
Switzerland
+41 31 631 37 75 (Phone)
+41 31 631 84 21 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Dennis P. Sheehan (Contact Author)

Pennsylvania State University ( email )

Smeal College of Business
University Park, PA 16802
United States
814-863-8512 (Phone)
814-865-3362 (Fax)

Gregory B. Kadlec

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States
540-231-4316 (Phone)

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