The Dutch Grey Market
AbstractWhen-issued trading concerns transactions in securities that have not yet been issued. This type of trade often takes place in a so-called ‘grey market’, in which all contracts are conditional on the issuance of the security. In this paper, we investigate the Dutch grey market for when-issued shares prior to stock splits and IPOs, using a unique, handcollected dataset. Stock splits are more likely to be preceded by when-issued trading when the underlying firm is larger, the relative trading volume of the stock is higher, and the stock return is less volatile. This implies that market makers are more likely to set up a when-issued market after a stock split announcement when the number of expected transactions is large and the expected costs are low. On the basis of when-issued and regular share closing prices, we calculate premiums of 0.50% to 1.50% on nearly all of the 50 trading days leading up to the stock split. When corrected for the time value of money, these when-issued securities trade at a small but economically significant premium of on average about 0.60% over the regular shares during a limited period before the effective date of the stock split. However, this when-issued premium disappears in the last days prior to the stock split. In the case of when-issued trading in the run-up to an IPO, we find that the prices paid in the grey market are in line with the first day closing prices. This confirms the findings of Löffler, Panther and Theissen (2005) that pre-IPO prices are highly informative.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2008-88.
Date of creation: 2008
Date of revision:
Contact details of provider:
Web page: http://center.uvt.nl
when-issued trading; stock splits; initial public offerings; market inefficiency;
Other versions of this item:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-01-31 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Dorn, Daniel, 2009. "Does Sentiment Drive the Retail Demand for IPOs?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(01), pages 85-108, February.
- Alex Stomper & Wolfgang Aussenegg & Pegaret Pichler, 2004.
"IPO Pricing with Bookbuilding and a When-Issued Market,"
2004.8, Fondazione Eni Enrico Mattei.
- Aussenegg, Wolfgang & Pichler, Pegaret & Stomper, Alex, 2006. "IPO Pricing with Bookbuilding and a When-Issued Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(04), pages 829-862, December.
- Angel, James J, 1997. " Tick Size, Share Prices, and Stock Splits," Journal of Finance, American Finance Association, vol. 52(2), pages 655-81, June.
- Grinblatt, Mark S. & Masulis, Ronald W. & Titman, Sheridan, 1984. "The valuation effects of stock splits and stock dividends," Journal of Financial Economics, Elsevier, vol. 13(4), pages 461-490, December.
- Ezzell, John R. & Miles, James A. & Mulherin, J. Harold, 2003. "Is There Really a When-Issued Premium?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(03), pages 611-634, September.
- James J. Angel & Raymond M. Brooks & Prem G. Mathew, 2004. "When-Issued Shares, Small Trades, And The Variance Of Returns Around Stock Splits," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 27(3), pages 415-433.
- Francesca Cornelli & David Goldreich & Alexander Ljungqvist, 2006. "Investor Sentiment and Pre-IPO Markets," Journal of Finance, American Finance Association, vol. 61(3), pages 1187-1216, 06.
- Nayar, Nandkumar & Rozeff, Michael S., 2001. "Record Date, When-Issued, and Ex-Date Effects in Stock Splits," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(01), pages 119-139, March.
- Loffler, Gunter & Panther, Patrick F. & Theissen, Erik, 2005. "Who knows what when? The information content of pre-IPO market prices," Journal of Financial Intermediation, Elsevier, vol. 14(4), pages 466-484, October.
- Benveniste, Lawrence M. & Spindt, Paul A., 1989. "How investment bankers determine the offer price and allocation of new issues," Journal of Financial Economics, Elsevier, vol. 24(2), pages 343-361.
- Lakonishok, Josef & Lev, Baruch, 1987. " Stock Splits and Stock Dividends: Why, Who, and When," Journal of Finance, American Finance Association, vol. 42(4), pages 913-32, September.
- Lamoureux, Christopher G & Poon, Percy, 1987. " The Market Reaction to Stock Splits," Journal of Finance, American Finance Association, vol. 42(5), pages 1347-70, December.
- Hanley, Kathleen Weiss, 1993. "The underpricing of initial public offerings and the partial adjustment phenomenon," Journal of Financial Economics, Elsevier, vol. 34(2), pages 231-250, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Broekman).
If references are entirely missing, you can add them using this form.