Seasoned Public Offerings: Resolution of the 'New Issues Puzzle'
38 Pages
Posted: 21 Feb 2001
Last revised: 4 May 2009
Tuck School of Business at Dartmouth; European Corporate Governance Institute (ECGI)
University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)
BI Norwegian Business School - Department of Financial Economics
Date Written: 2000
Abstract
The 'new issues puzzle' is that stocks of common stock issuers subsequently underperform nonissuers matched on size and book-to-market ratio. With 7000 seasoned equity and debt issues, we document that issuer underperformance reflects lower systematic risk exposure for issuing firms relative to the matches. A consistent explanation is that, as equity issuers lower leverage, their exposures to unexpected inflation and default risks decrease, thus decreasing their stocks' expected returns relative to matched firms. Equity issues also significantly increase stock liquidity (turnover), again lowering expected returns relative to nonissuers. We conclude that the 'new issue puzzle' is explained by a failure of the matched-firm technique to provide a proper control for risk. This conclusion is robust to issue characteristics and the choice of factor model framework.
Keywords: New issues puzzle, long-run performance, factor risk, seasoned public offerings, equity issuer
JEL Classification: G12, G14, G32
Suggested Citation:
Suggested Citation
Eckbo, B. Espen and Masulis, Ronald W. and Norli, Oyvind, Seasoned Public Offerings: Resolution of the 'New Issues Puzzle' (2000). Journal of Financial Economics, Vol. 56, 251-291, 2000; Tuck School of Business Working Paper. Available at SSRN: https://ssrn.com/abstract=251502
