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Is There Really a When-Issued Premium?

Published online by Cambridge University Press:  06 April 2009

John R. Ezzell ,
James A. Miles  and
J. Harold Mulherin
John R. Ezzell
Affiliation:
[email protected], Department of Finance, Pennsylvania State University, University Park, PA 16802;
James A. Miles
Affiliation:
[email protected], Department of Finance, Pennsylvania State University, University Park, PA 16802;
J. Harold Mulherin
Affiliation:
[email protected], Department of Economics, Claremont McKenna College, Claremont, CA 91711.
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Abstract

We use a unique set of equities in the when-issued market to provide new tests of the law of one price in financial markets. We compare the prices of when-issued and regular way shares of publicly traded subsidiaries and their parents around the time the subsidiaries are fully divested and we find that the when-issued shares of the subsidiary trade at a discount. Pricing differences stem from measurement factors such as exchange location and bid-ask clustering that bias the observed when-issued pricing differential away from zero. The remaining difference is due to asymmetric movements in bid and ask quotes in the two markets. We also find evidence of temporary price pressures on the date of execution of the spinoff of the subsidiary firms that bear resemblance to the pricing in the when-issued market. We interpret the evidence as consistent with the law of one price in the presence of transaction costs and microstructure phenomena.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 38 , Issue 3 , September 2003 , pp. 611 - 634
Copyright
Copyright © School of Business Administration, University of Washington 2003

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