Book Description

The Penny Stock Reform Act of 1990 (PSRA) was an attempt to curb fraudulent security issues by placing severe restrictions on initial public offerings (IPOs) that were priced below $5. The regulation had the cosmetic effect of reducing the number of IPOs 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 non-penny stocks declined significantly in the post-PSRA period. We present evidence that attributes the decline in abnormal returns to migration of speculative issuers into the non-penny range.