ABSTRACTS OF DOCTORAL DISSERTATIONS

AN ANALYSIS OF THE PRICE BEHAVIOR OF

INITIAL COMMON STOCK OFFERINGS*
JAMES D . BLUM
University of Delaware
How DO INITIAL common stock offerings perform compared to the over-the-counter
market? Can variations in market rates of return on various kinds of initial stock
offerings be explained by differences in risk, as measured by relative variability and
probability of decline? These questions puzzle investors and generate continual specu-
lation. The objective of this study was to answer the above questions and others about
the price behavior of initial common stock offerings.
The total period covered by the study extended from January 19, 1965 to June 30,
1970. A random sample of 400 initial common stock offerings was drawn. The
market returns and risks associated with these 400 issues were calculated for sixteen
time periods, ranging from one week to one year after the offering date. These re-
turns, adjusted for the risk associated with a stock that had never had a previous
public market, were compared to return on the Over-the-Counter Industrial Average
(OTC). The findings were that initial offerings have shown a performance superior
to that of the OTC Average in both the short and long run.
The 400 issues were stratified into four subgroups according to who received the
proceeds from the sale of the offering, the company and/or selling stockholder(s);
market rates of return and associated risks were calculated for each. The four sub-
groups were initial primary offerings, those in which the proceeds from the sale of the
offering go to the company; initial mainly primary offerings, those in which 50 to 99
per cent of the proceeds go to the company; initial mainly secondary offerings, those
in which one to 49 per cent of the proceeds go to the company; and initial secondary
offerings, those in which the proceeds go to the selling stockholder(s). Initial primary
offerings proved to be a better investment, with both higher return and lower risk,
than initial mainly primary, mainly secondary and secondary offerings. In fact, the
mean rate of return on primary offerings as a group varied from a high of 83.03
per cent, nine months after the offering date, to a low of 46.13 per cent, one week after
the offering. The other groups' mean rates of return were approximately 25 per cent
below those on the primary offerings. The market risk associated with primary offer-
ings, however, was below that of the other groups. Variations in return between types
of initial offering distributions could not be explained by risk differentials. Return
differentials might be explained by the fact that underwriters held warrants in 78.1
per cent of initial primary offerings floated in 1968, 33 per cent more than in any other
group of initial offerings. This strongly indicates that investment bankers have either
under-priced and/or pushed in the after-market those initial offerings in which they
held greatest financial interest.
This study provides a guide to risk and return possibilities encountered in initial
offering investing. It may aid investors interested in the initial offerings' market to
determine optimal strategies of buying and selling such offerings. It could also serve
to demonstrate to the securities authorities that many inequities have existed in the
initial offerings' market.

• A dissertation completed at Michigan State University in 1971.

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