The New Issues Puzzle: Testing the Investment-Based Explanation

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

See all articles by Evgeny Lyandres

Evgeny Lyandres

Boston University

Jerry Sun

Invesco Advisers, Inc.

Lu Zhang, 张橹

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

Date Written: November 1, 2006


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

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: or

Evgeny Lyandres (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-3582279 (Phone)

Le Sun

Invesco Advisers, Inc.

United States

Lu Zhang

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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