Workshop Series: Ghon Rhee
This paper identifies characteristics of U.S. penny stocks that are listed on NYSE, AMEX, and NASDAQ. Consistent with our expectation, these stocks exhibit high return, high beta, high idiosyncratic volatility, small capitalization, high BM ratio, and poor liquidity. Contrary to our expectation, however, the average institutional ownership of penny stocks is surprisingly high at 23% and each penny stock is on average owned by 27 institutional investors. The abnormal returns of penny stocks become insignificant in the asset pricing model framework only after the illiquidity factor is introduced to the Fama and French (1993) three-factor model and the Carhart (1997) four-factor model. However, penny stocks with high institutional ownership generate significant abnormal returns, whereas penny stocks with low institutional ownership do not show these abnormal returns. In addition, zero-cost penny stock portfolios that are constructed on firm size, BM ratio, and institutional ownership can yield significant profitability.
JEL classification: G14; G18
Keywords: Listed Penny Stocks; Asset Pricing Model; Trading Strategies; Liquidity; Gibbs Effective Transaction Costs; Dimson Beta; Idiosyncratic Volatility; Institutional Ownership
Dr. Rhee received his BA from Seoul National University Law School, MBA from Rutgers University, and Ph.D. from The Ohio State University. He is holding the Shidler Distinguished Professor of Finance and serves as Executive Director of the Asia-Pacific Financial Markets (FIMA) Research Center at the University of Hawai’i. The overall objective of the FIMA Research Center is to spearhead both academic and policy research on financial markets in the Asia-Pacific region, integrating academic and practitioner viewpoints. The FIMA Research Center is globally recognized as a leading research institute in the area of Asian financial markets and banking systems and it is the home of the Pacific-Basin Finance Journal, a premier academic journal focusing on Asia-Pacific capital markets and financial systems. Dr. Rhee is managing editor of the Journal. He is currently holding a visiting research professorship at Monash University (Australia) since September 2011.
He served as the chairman of the Asian Shadow Financial Regulatory Committee (ASFRC) in 2004-2007. The ASFRC is a part of the Global Shadow Financial Regulatory Committees which include the committees of United States, Europe, Japan, Latin America, Australia/New Zealand, and Asia. The ASFRC is charged to identify and analyze developing trends and ongoing events in Asia that may affect the efficiency and safe operation of financial markets and the financial services industry; to explore the spectrum of short- and long-term implications of emerging problems and policy changes; to help develop private, regulatory and legislative responses to problems that hinder efficiency; and to assess and respond to proposed and actual public policy initiatives with respect to the impact on the public interest.
He served as the dean (2008-2011) of the SKKU Business School in Seoul, Korea to spearhead various reform programs to upgrade its research programs while he is on leave from University of Hawai’i. He was Resident Scholar (1997-1999) of the Asian Development Bank. As Resident Scholar of the Bank, he spearheaded research programs on Asian financial crisis, mortgage-backed securities markets, and government bond markets. He was also involved with financial sector reform programs for Thailand, Indonesia, and Korea as part of the International Monetary Fund’s support packages. He was a key member of the Bank team which created a regional economic monitoring program and this program eventually led to the creation of the Office of Economic Integration. He was a Professor of Finance and Director of the Sandra Ann Morsilli Pacific-Basin Capital Markets Research Center of the University of Rhode Island. He also taught at University of Pittsburgh as an assistant professor of finance. He did teaching at Carnegie-Mellon University, Ohio State University, University of Zagreb, Hanoi School of Business, and Renmin University of China. He also served as a visiting research professor at the Hitotsubashi University (Japan), Korea Advanced Institute of Science and Technology, University of Malaya, Renmin University, and Monash University (Australia). He was the Tun Ismail Mohamed Ali Distinguished Chair in Investment and Finance of Universiti Kebangsaan Malaysia (National University of Malaysia).
His research has been published in numerous academic journals, including: Journal of Finance, Review of Financial Studies, Journal of Financial and Quantitative Analysis, Journal of Banking and Finance, Journal of International Money and Finance, Journal of Financial Markets, Journal of Accounting and Economics, Journal of Risk and Insurance, Journal of Empirical Finance, Journal of Financial Services Research, Journal of International Business Studies, Decision Sciences, Financial Management, etc. He has published over 90 academic papers and edited or authored 18 books on Asian financial markets.
He is a board member of the Asian Finance Association, an association of academic researchers with research interests in Asian finance. He was the founding president of the Pacific-Basin Financial Management Society, an academic association created to promote academic research on the region’s financial and capital markets. He also served as a board member of the U.S. Financial Management Association. He served as Program Chair of the Annual Pacific-Basin Finance Conferences, 1989-1997 and of the Asian Finance Association Annual Meetings, 2010-2012.
Dr. Rhee was a founding member and board member of the Ohana Pacific Bank, which is a state-chartered bank and serves ethnic minority business communities (Korean, Chinese, Philippine, Viet Nam, and Indonesian) in Hawaii. The Bank has been in business since June 2006. He consulted for a number of international institutions such as Asian Development Bank, Asian Development Bank Institute, International Chamber of Commerce, International Monetary Fund, Mexican Ministry of Finance and Public Credits, Organization for Economic Cooperation and Development, Securities and Futures Commission of Hong Kong, United Nations Industrial Organization, U.S. Agency for International Development, Bursa Malaysia (formerly Kuala Lumpur Stock Exchange), Jakarta Stock Exchange, and MIR Asset Management Ltd. Of Australia. He received the 2001 Archimedes Award from University of Catania (Sicily) and Erasmus University (Netherlands) for his contribution to academic research on Asian capital markets.
S. Ghon Rhee, PhD
Shidler Distinguished Professor of Finance
Executive Director of Asia-Pacific Financial Markets Research Center
Managing Editor of the Pacific-Basin Finance Journal
Shidler College of Business, University of Hawai’i