Short-run analysis of new issue price performance

Abstract

Scope and Method of Study: The past decade has witnessed a phenomenal increase in investment interest in new common stock issues of corporations ''going public." The object of this report is to examine the short-run capital appreciation performance of these newly issued securities. Price performance is measured in terms of the magnitude and volatility of weekly percentage price changes. The analysis is accomplished for a 100 member sample and two component 50 member samples, the latter of which are homogeneous with regard to their origin in rising or falling markets. A twelve week price history is used for the short-run study.

An analysis of the results obtained from testing seven formal hypotheses reveals much about the distribution, direction, magnitude and volatility of the observed new issue weekly price changes. The theory underlying the probable causes of the results obtained is well elaborated.

Findings and Conclusions from resulting Chi-square statistics, all three samples were assumed to be representative of a normally distributed population. The mean of the weekly percentage price changes was positive for all samples & bear market sample, 1.76% per week; bull market sample, 4.25% per week; total sample, 3.01% per week. However, as expected, the T-statistic proved the means of the bear and bull market samples to be significantly different in regard to their respective distributions. The initial week after issue showed the greatest gains (over 20% in each case) end generally low relative dispersion. The most favorable performance occurred in the initial week after issue for the bear market sample, and a theoretical basis for this somewhat surprising result is well documented.