Seasoned Public Offerings: Resolution of the 'New Issues Puzzle'
B. Espen Eckbo
Tuck School of Business at Dartmouth; European Corporate Governance Institute (ECGI)
Ronald W. Masulis
University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN)
BI Norwegian Business School - Department of Financial Economics
Journal of Financial Economics, Vol. 56, 251-291, 2000
Tuck School of Business Working Paper
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.
Number of Pages in PDF File: 38
Keywords: New issues puzzle, long-run performance, factor risk, seasoned public offerings, equity issuer
JEL Classification: G12, G14, G32
Date posted: February 21, 2001 ; Last revised: May 4, 2009