Hostname: page-component-7c8c6479df-xxrs7 Total loading time: 0 Render date: 2024-03-29T04:38:39.088Z Has data issue: false hasContentIssue false

Is There Really a When-Issued Premium?

Published online by Cambridge University Press:  06 April 2009

John R. Ezzell
Affiliation:
jre@psu.edu, Department of Finance, Pennsylvania State University, University Park, PA 16802;
James A. Miles
Affiliation:
jmiles@psu.edu, Department of Finance, Pennsylvania State University, University Park, PA 16802;
J. Harold Mulherin
Affiliation:
harold.mulherin@claremontmckenna.edu, Department of Economics, Claremont McKenna College, Claremont, CA 91711.

Abstract

We use a unique set of equities in the when-issued market to provide new tests of the law of one price in financial markets. We compare the prices of when-issued and regular way shares of publicly traded subsidiaries and their parents around the time the subsidiaries are fully divested and we find that the when-issued shares of the subsidiary trade at a discount. Pricing differences stem from measurement factors such as exchange location and bid-ask clustering that bias the observed when-issued pricing differential away from zero. The remaining difference is due to asymmetric movements in bid and ask quotes in the two markets. We also find evidence of temporary price pressures on the date of execution of the spinoff of the subsidiary firms that bear resemblance to the pricing in the when-issued market. We interpret the evidence as consistent with the law of one price in the presence of transaction costs and microstructure phenomena.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 2003

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Alchian, A., and Allen, W. R.. Exchange and Production. New York, NY: Wadsworth Publishing Co. (1977).Google Scholar
Asplund, M., and Friberg, R.. “The Law of One Price in Scandinavian Duty-Free Stores.” American Economic Review, 91 (2001), 10721083.Google Scholar
Barber, B. M.Noise Trading and Prime and Score Premiums.” Journal of Empirical Finance, 1 (1994), 251278.Google Scholar
Barclay, M. J., and Litzenberger, R. H.. “Announcement Effects of New Equity Issues and the Use of Intraday Price Data.” Journal of Financial Economics, 21 (1983), 7199.Google Scholar
Bhattacharya, M.Transactions Data Tests of the Efficiency of the Chicago Board Options Exchange.” Journal of Financial Economics, 12 (1983), 161185.Google Scholar
Bookstaber, R. M.Observed Option Mispricing and the Nonsimultaneity of Stock and Option Quotations.” Journal of Business, 54 (1981), 141155.Google Scholar
Brooks, R. M., and Chiou, S.-N.. “A Bias in Closing Prices: The Case of the When-Issued Pricing Anomaly.” Journal of Financial and Quantitative Analysis, 30 (1995), 441454.Google Scholar
Choi, D., and Strong, R. A.. “The Pricing of When-Issued Common Stock.” Journal of Finance, 38 (1983), 12931298.Google Scholar
Conrad, J. S., and Conroy, R.. “Market Microstructure and the Ex-Date Return.” Journal of Finance, 49 (1994), 15071519.Google Scholar
Copeland, T. E.; Lemgruber, E. F.; and Mayers, D.. “Corporate Spinoffs: Multiple Announcements and Ex-Date Abnormal Performance.” In Modern Finance and Industrial Economics: Papers in Honor of J. Fred Weston, Copeland, T. E., ed. New York, NY: Blackwell (1987).Google Scholar
Cornell, B., and Liu, Q.. “The Parent Company Puzzle: When is the Whole Worth Less Than One of the Parts?Journal of Corporate Finance, 7 (2001), 341366.CrossRefGoogle Scholar
Cushing, D., and Madhavan, A.. “Stock Returns and Trading at the Close.” Working Paper, Univ. of Southern California (1999).Google Scholar
Easley, D.; O'Hara, M.; and Saar, G.. “How Stock Splits Affect Trading: A Microstructure Approach.” Journal of Financial and Quantitative Analysis, 36 (2001), 2551.Google Scholar
Elton, E. J.; Gruber, M. J.; and Busse, J.. “Do Investors Care about Sentiment?Journal of Business, 71 (1998), 477500.Google Scholar
Engel, C., and Rogers, J. H.. “Violating the Law of One Price: Should We Make a Federal Case out of It?Journal of Money, Credit and Banking, 33 (2001), 115.Google Scholar
Fama, E.Efficient Capital Markets: II.” Journal of Finance, 46 (1991), 15751617.Google Scholar
Froot, K. A., and Dabora, E. M.. “How Are Stocks Affected by the Location of Trade?Journal of Financial Economics, 53 (1999), 189216.Google Scholar
Grinblatt, M. S.; Masulis, R. W.; and Titman, S.. “The Valuation Effects of Stock Splits and Stock Dividends.” Journal of Financial Economics, 13 (1984), 461490.Google Scholar
Hakansson, N. H.Changes in the Financial Market: Welfare and Price Effects and the Basic Theorems of Value Conservation.” Journal of Finance, 37 (1982), 9771004.Google Scholar
Harris, L.A Day-End Transaction Price Anomaly.” Journal of Financial and Quantitative Analysis, 24 (1989), 2945.Google Scholar
Harris, L., and Gurel, E.. “Price and Volume Effects Associated with Changes in the 500 List: New Evidence for the Existence of Price Pressures.” Journal of Finance, 41 (1986), 815829.Google Scholar
Ho, T., and Stoll, H. R.. “Optimal Dealer Pricing under Transactions and Return Uncertainty.” Journal of Financial Economics, 9 (1981), 4773.Google Scholar
Hwang, C. Y.Microstructure and Reverse Stock Splits.” Review of Quantitative Finance and Accounting, 5 (1995), 169177.CrossRefGoogle Scholar
Jarrow, R. A., and O'Hara, M.. “Primes and Scores: An Essay on Market Imperfections.” Journal of Finance, 44 (1989), 12631287.Google Scholar
Jensen, M. C.Some Anomalous Evidence Regarding Market Efficiency.” Journal of Financial Economics, 6 (1978), 95101.Google Scholar
Kadapakkam, P.-R.Reduction of Constraints on Arbitrage Trading and Market Efficiency: An Examination of Ex-Day Returns in Hong Kong after Introduction of Electronic Settlement.” Journal of Finance, 55 (2000), 28412861.Google Scholar
Kryzanowski, L., and Zhang, H.. “Intraday Market Price Integration for Shares Cross-Listed Internationally.” Journal of Financial and Quantitative Analysis, 37 (2002), 243269.CrossRefGoogle Scholar
Lamont, O. A., and Thaler, R. H.. “Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs.” Working Paper, Univ. of Chicago (2001).Google Scholar
Lamoureux, C. G., and Poon, P.. “The Market Reaction to Stock Splits."” Journal of Finance, 42 (1987), 13471370.Google Scholar
Lamoureux, C. G., and Wansley, J. A.. “The Pricing of When-Issued Securities.” Financial Review, 24 (1989), 183198.Google Scholar
Lease, R. C.; Masulis, R. W.; and Page, J. R.. “An Investigation of Market Microstructure Impacts on Event Study Returns.” Journal of Finance, 46 (1991), 15231536.Google Scholar
Lee, C. M. C.Market Integration and Price Execution for NYSE-Listed Securities.” Journal of Finance, 48 (1993), 10091038.Google Scholar
Lee, C. M. C.; Shleifer, A.; and Thaler, R. H.. “Investor Sentiment and the Closed-End Fund Puzzle.” Journal of Finance, 46 (1991), 75109.Google Scholar
Lin, J.-C., and Rozeff, M. S.. “Price Adjustment Delays and Arbitrage Costs: Evidence from the Behavior of Convertible Preferred Prices.” Journal of Financial and Quantitative Analysis, 30 (1995), 6180.Google Scholar
L., Loss, and Vernon, R.. “When-Issued Securities Trading in Law and Practice.” Yale Law Journal, 54 (1945), 741798.Google Scholar
Madhavan, A. “The Russell Reconstitution Effect.” Working Paper, ITG Inc. (2001).Google Scholar
Maloney, M. T., and Mulherin, J. H.. “The Effects of Splitting on the Ex: A Microstructure Reconciliation.” Financial Management, 21 (1992), 4459.Google Scholar
Mitchell, M.; Pulvino, T.; and Stafford, E.. “Limited Arbitrage in Equity Markets.” Journal of Finance, 57 (2002), 551584.Google Scholar
Nayar, N., and Rozeff, M. S.. “Record Date, When-Issued, and Ex-Date Effects in Stock Splits.” Journal of Financial and Quantitative Analysis, 36 (2001), 119139.CrossRefGoogle Scholar
Phillips, S. M., and Smith, C. W. JrTrading Costs for Listed Options: The Implications for Market Efficiency.” Journal of Financial Economics, 8 (1980), 179201.Google Scholar
Pontiff, J.Costly Arbitrage: Evidence from Closed-End Funds.” Quarterly Journal of Economics, 111 (1996), 11351151.Google Scholar
Rosenthal, L., and Young, C.. “The Seemingly Anomalous Price Behavior of Royal Dutch/Shell and Unilever N.V./PLC.” Journal of Financial Economics, 26 (1990), 123141.Google Scholar
Rosenthal, L.The Anomalous Price Behavior of Elsevier NV and Reed International P.L.C.” Working Paper, Bentley College (1999).Google Scholar
Schill, M. J., and Zhou, C.. “Pricing and Emerging Industry: Evidence from Internet Subsidiary Carve-Outs.” Financial Management, 30 (2001), 533.Google Scholar
Schultz, P.Stock Splits, Tick Size and Sponsorship.” Journal of Finance, 55 (2000), 429450.Google Scholar
Shleifer, A.Inefficient Markets: An Introduction to Behavioral Finance. Oxford Univ. Press (2000).Google Scholar
Thaler, R. H.The End of Behavioral Finance.” Financial Analysts Journal, 55 (1999), 1217.Google Scholar
Vijh, A. M.The Spinoff and Merger Ex-Date Effects.” Journal of Finance, 49 (1994), 581609.Google Scholar