Tests for Price Effects of New Issues of Seasoned Securities

Authors

  • ALAN C. HESS,

  • PETER A. FROST

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    • Graduate School of Business Administration, University of Washington, Seattle, Washington 98195.

      The data for this study were assembled by Gary Fournier. The empirical work reflects the technical assistance of Bill Burrows. J. Richard Zecher provided the opportunity and resources for much of the work.


ABSTRACT

Do new issues of seasoned securities cause significant price movements in the neighborhood of the issue day? This paper presents an empirical comparison of three competing hypotheses: the SEC view that a new issue causes a permanent price decline; the underwriter view that there is only a temporary price decline during the distribution period; and the efficient market hypothesis (EMH) that implies the absence of any price effects. Several empirical tests of the competing hypotheses using data on new issues of utility stocks traded on the NYSE reject the SEC and underwriter views in favor of the EMH.

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