Long-Run Performance of Penny Stock IPOs

Abstract

This article examines short- and long-run performance of one special class of penny stocks. It examines initial public offerings (IPOs) filed for and issued as penny stocks, as defined by the amended SEC Act of 1990. Short- and long-run performance analysis reveals that, in general, penny stocks show high performance with raw returns of 18% to 20% in the first year of issue, but the returns decline sharply after the initial 13-month period. The study find an 11-month optimal holding period over which an investor could maximize returns in a portfolio of penny stocks. It further shows that a passive buy-and-hold investment in penny stocks with an investment horizon beyond the optimal period of 13-months can be a poor investment, but an actively managed penny stock portfolio can outperform comparable benchmark portfolios of various market indices on both a raw and a risk-adjusted basis.

TOPICS: Security analysis and valuation, performance measurement