The Pricing of When-Issued Common Stock: A Note

This paper investigates whether the price differential between new shares created as a result of a stock split and traded on a ''when-issued'' basis, and old shares can be explained solely by the different settlement procedures. The data are the actual transaction prices of when-...

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Bibliographic Details
Published in:The Journal of finance (New York) 1983-09, Vol.38 (4), p.1293-1298
Main Authors: CHOI, DOSOUNG, STRONG, ROBERT A.
Format: Article
Language:English
Subjects:
Common stock
Differentials
Financial securities
Investors
Issued capital
Odd lot trading
Pricing
Securities trading
Security prices
Statistical analysis
Stock exchanges
Stock prices
Stock shares
Stock splits
Studies
Trade
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Summary:This paper investigates whether the price differential between new shares created as a result of a stock split and traded on a ''when-issued'' basis, and old shares can be explained solely by the different settlement procedures. The data are the actual transaction prices of when-issued securities arising from stock splits during the period 1977-1980, and the actual transaction prices for the associated old shares. The results reveal a significant price difference between the old shares and the new when-issued shares that persists even after accounting for the timing difference in the settlement procedure. It is probable that market imperfections such as odd lot trading fees affect the pricing of these securities, but further analysis is necessary to determine how the market assigns value to these securities.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.1983.tb02298.x