The theory of efficient capital markets suggests that if the capital markets are efficient, security prices can be assumed at any time to “fully reflect” all available information. Various forms of the model have been subjected to extensive empirical testing. The results of these tests have been such that in reviewing the literature on the theory Fama [3] states, “ … the evidence in support of the efficient markets model is extensive, and (somewhat uniquely in economics) contradictory evidence is sparse.” Most of the research, however, has been addressed to the question of whether prices “fully reflect” particular subsets of available information. The validity of these results depends on the extent to which the information in the subset used for testing captures the information actually impounded in prices.

One of the phenomena on Wall Street during the sixties was the new issues market. During the decade new issues became a popular investment alternative, particularly in the bull markets of 1962, 1966, and 1968. The height of enthusiasm occurred in the hot new issues market of the fiscal year 1968–1969 when 2, 171 issues were offered to the public. This interest in new issues was followed by studies such as Reilly and Hatfield [12], McDonald and Fisher [9], the SEC [13], and others, all of which show that there is a downward bias in the issue price of new issues. Why this downward bias is present was treated later by Logue [5]. Although these studies also suggest that there is a difference in the pricing behavior by individual underwriters, none of the previous studies has addressed itself specifically to this point.