Impact of the Penny Stock Reform Act of 1990 on the initial public offering market

The Penny Stock Reform Act of 1990 (PSRA) was an attempt to curb fraudulent security issues by placing severe restrictions on initial public offerings that were priced below $5. The regulation had the cosmetic effect of reducing the number of initial public offerings priced below $5 but had no substantive impact on issuer quality. Delisting risk, which is a measure of issuer quality, did not decline significantly in the post-PSRA period. Instead, abnormal returns earned by a portfolio of nonpenny stocks declined significantly in the post-PSRA period. We present evidence that attributes the decline in abnormal returns to the migration of speculative issuers into the nonpenny range.