IPO underpricing and their determinants: penny stocks versus non-penny stocks

We consider the initial public offering (IPO) returns of penny stocks before and after Penny Stock Reform Act (PSRA) implementation. We extend the work of Bradley et al. (2006) by looking not only at NASDAQ small capitalisation issues, but also those issued on the bulletin boards and pink sheets. These stocks exhibit average first-day excess returns of 128% relative to the NASDAQ Decile 1 index. Higher-priced offerings in the same markets as the penny stocks return only 7.6% more than a comparison benchmark. Cross-sectional analyses show that lower-priced stocks and stocks of smaller firms are underpriced to a greater degree. Consistent with the information asymmetry hypothesis, pink sheet issues have higher first-day returns than equities issued in the more exposed and more regulated environments of the NASDAQ small capitalisation markets and the OTC markets. Post-PSRA abnormal returns are significantly less than pre-PSRA returns, and there is a marked shift toward private issues.