New Issues Revisited

Abstract

During the late 1960s and early 1970s there was substantial interest in initial public offerings of common stock i.e., the sale of common stock to the public by previously closely-held companies that did not have a public market for the stock. (These initial public offerings are subsequently referred to as new issues.) Because of investor interest in these offerings, numerous firms took the opportunity to float new issues. A tabulation of the number and value of unseasoned new issues registered with the Securities and Exchange Commission between 1968 and 1976 is contained in Exhibit 1. As shown, the number was substantial, but highest in 1972. During this period, several studies examined the pattern of price changes following initial public offerings to determine the relative rates of return derived by investors in new issues during various periods after the offering. The results of these several studies show that for the period 1960-1970 the very short-run returns (one week and one month after offering) were generally higher than aggregate market returns, while longer-run returns for investors who acquired the new issues in the after-market were consistent with risk. All studies of the performance of new issues generally cease with data from the late 1960s or early 1970s. Therefore, the purpose of this study is to update the prior studies using data beginning with 1972 and extending into 1975. In addition, the analysis compares the returns on new issues to two different stock market series (the Dow Jones Industrial Average and the National Association of Securities Dealers Automatic Quotations Industrial Index) and examines the effect of different market periods on the results. Finally, there is an examination of the effect of analyzing new issues with incomplete data compared to limiting the analysis to new issues with all the required data as done in most prior studies. The initial section discusses why one might expect abnormally high returns on initial public offerings of common stock because one should expect underwriters to underprice unseasoned common stock issues. There is also a discussion of high returns due to high risk; such returns are not abnormal but merely consistent with the risk involved. The subsequent section contains a discussion of previous studies on the relative performance of unseasoned common stock issues after the offering. The results are noteworthy because of their consistency even though the tech-