On the existence of sub-standard security markets: The IPOs of Blinder-Robinson

Abstract

In a standard security market, it is assumed that market participants are rational, capable of acquiring and utilizing information, fraudulent and opportunistic behaviors do not pay and are avoided, and transaction costs are relatively low. Furthermore, there is no group of participants who are consistent winners or losers; and collectively, no negative net present value projects are undertaken. We label a market as ‘sub standard’ if most of these conditions do not hold. Theoretically sub-standard markets are predicted to not exist at all, i.e. since even the most sophisticated institutional investors with the least transaction and information costs will not participate. This paper presents evidence of the existence of such ‘sub-standard’ security market over an extended period. Specifically, we present an in-depth analysis of twelve IPOs, underwritten by Blinder-Robinson. The IPOs were offered during a period when Blinder-Robinson was fighting unsuccessfully against NASD sanctions and SEC suspensions. The study is unique in several ways. It is the first detailed investigation of the market for the very small penny stock issues in which the per share offering prices of IPOs were at 5¢ or less and the gross IPO proceeds amount to only a few million dollars. We present evidence on the nature of the companies, the background of the executives and the board of directors and the business and financial characteristics of the IPOs. We also document the differences in the rates of return to various groups involved in the financing or management of these companies: the managers, other insiders, the underwriters and outside investors who invested before, at or after the IPOs. Finally, this study performs an original analysis of the microstructure of the penny stockbroker's operations by analyzing inside and outside bid ask quotes. In addition to broker's markups and markdowns, we have also calculated a measure of the market maker/brokerage house's incentive to its brokers to buy from or sell to their customers.

Citation

Ang, J.S. and Brown, S.L. (2001), "On the existence of sub-standard security markets: The IPOs of Blinder-Robinson", Advances in Financial Economics (Advances in Financial Economics, Vol. 6), Emerald Group Publishing Limited, Leeds, pp. 1-38. https://doi.org/10.1016/S1569-3732(01)06001-7