Impact of the Penny Stock Reform Act of 1990 on the Initial Public Offering Market

Randolph P. Beatty · Padma Kadiyala

38 citations0/0 files storedThe Journal of Law and Economics

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Corporate Finance and Governance Financial Markets and Investment Strategies Securities Regulation and Market Practices

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 that were priced below $5. The regulation had the cosmetic effect of reducing the number of initial public offerings 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 nonpenny stocks declined significantly in the post‐PSRA period. We present evidence that attributes the decline in abnormal returns to the migration of speculative issuers into the nonpenny range.

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References

1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1996Multifactor Explanations of Asset Pricing Anomalies 1995The Limits of Arbitrage 1986Why new issues are underpriced 1986Investment banking, reputation, and the underpricing of initial public offerings 1998Market efficiency, long-term returns, and behavioral finance1The comments of Brad Barber, David Hirshleifer, S.P. Kothari, Owen Lamont, Mark Mitchell, Hersh Shefrin, Robert Shiller, Rex Sinquefield, Richard Thaler, Theo Vermaelen, Robert Vishny, Ivo Welch, and a referee have been helpful. Kenneth French and Jay Ritter get special thanks.1 1990Initial Public Offerings and Underwriter Reputation 1998Underwriter Reputation, Initial Returns, and the Long‐Run Performance of IPO Stocks

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2005Corporations, collective action and corporate governance: One size does not fit all 2005Corporations, collective action and corporate governance: One size does not fit all 2009A Comparison of Penny Stock Initial Public Offerings and Reverse Mergers as Alternative Mechanisms to Going Public 2007The Survival and Success of Penny Stock IPOs: Canadian Evidence

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