The New Issues Puzzle: Testing the Investment-Based Explanation

Lyandres, Evgeny; Sun, Jerry; Zhang, Lu

doi:hhm058

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The New Issues Puzzle: Testing the Investment-Based Explanation

The Review of Financial Studies, Vol. 21, Issue 6, pp. 2825-2855, 2008

42 Pages Posted: 15 Dec 2008 Last revised: 14 Mar 2013

See all articles by Evgeny Lyandres

Lu Zhang

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Date Written: November 1, 2006

Abstract

An investment factor, long in low investment stocks and short in high investment stocks, helps explain the new issues puzzle. Adding this factor into standard factor regressions reduces substantially the magnitude of the underperformance following equity and debt offerings and the composite issuance effect. The reason is that issuers invest more than nonissuers, and the low-minus-high investment factor earns a signiﬁcant average return of 0.57% per month. Our evidence lends support to the real options theory, in which investment extinguishes risky expansion options, and the q-theory of investment, in which ﬁrms with low costs of capital invest more.

Keywords: The new issues puzzle, post-issue underperformance, real investment, time-varying expected returns

JEL Classification: E22, E44, G12, G14, G24, G31, G32

Suggested Citation: Suggested Citation

Lyandres, Evgeny and Sun, Le and Zhang, Lu, The New Issues Puzzle: Testing the Investment-Based Explanation (November 1, 2006). The Review of Financial Studies, Vol. 21, Issue 6, pp. 2825-2855, 2008, Available at SSRN: https://ssrn.com/abstract=1315611 or http://dx.doi.org/hhm058