Afro-Asian J. Finance and Accounting, Vol. 3, No. 1, 2012 69 Copyright © 2012 Inderscience Enterprises Ltd. IPO underpricing and their determinants: penny stocks versus non-penny stocks Daniel Konku Northern Michigan University, 1401 Presque Isle Avenue, Marquette, MI 49855, USA E-mail: dkonku@nmu.edu *Corresponding author Vivek Bhargava Alcorn State University, 9 Campus drive, Natchez, MS 39120, USA E-mail: vivek@alcorn.edu Abstract: We consider the initial public offering (IPO) returns of penny stocks before and after Penny Stock Reform Act (PSRA) implementation. We extend the work of Bradley et al. (2006) by looking not only at NASDAQ small capitalisation issues, but also those issued on the bulletin boards and pink sheets. These stocks exhibit average first-day excess returns of 128% relative to the NASDAQ Decile 1 index. Higher-priced offerings in the same markets as the penny stocks return only 7.6% more than a comparison benchmark. Cross-sectional analyses show that lower-priced stocks and stocks of smaller firms are underpriced to a greater degree. Consistent with the information asymmetry hypothesis, pink sheet issues have higher first-day returns than equities issued in the more exposed and more regulated environments of the NASDAQ small capitalisation markets and the OTC markets. Post-PSRA abnormal returns are significantly less than pre-PSRA returns, and there is a marked shift toward private issues. Keywords: initial public offering; IPO; penny stocks; penny stock IPO; Penny Stock Reform Act; PSRA; underpricing; determinants of penny stock pricing. Reference to this paper should be made as follows: Konku, D. and Bhargava, V. (2012) ‘IPO underpricing and their determinants: penny stocks versus non-penny stocks’, Afro-Asian J. Finance and Accounting, Vol. 3, No. 1, pp.69–88. Biographical notes: Daniel Konku is an Assistant Professor of Finance at Northern Michigan University. He received his PhD in Finance from Florida Atlantic University in 2006. He has taught corporate finance, investments, portfolio management and international finance. His research interests include initial public offerings and the microstructure of financial markets. He has published research articles in these areas in various financial journals. Vivek Bhargava is an Associate Professor of Finance at Alcorn State University’s School of Business, and is currently serving as the Interim Dean and Director for MBA programme. He received his Doctoral degree in Finance from University of Alabama in 1996. He has published over 25 research papers in the field of investment and derivatives in nationally and internationally recognised blind review journals and has made over 50 presentations at national and international academic conferences.