Seasoned Public Offerings: Resolution of the 'New Issues Puzzle'

38 Pages Posted: 21 Feb 2001 Last revised: 4 May 2009

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); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Oyvind Norli

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

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

B. Espen Eckbo (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-3953 (Phone)
603-646-3805 (Fax)

HOME PAGE: http://www.tuck.dartmouth.edu/eckbo

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Ronald W. Masulis

University of New South Wales - Australian School of Business ( email )

Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Oyvind Norli

BI Norwegian Business School - Department of Financial Economics ( email )

Nydalsveien 37
Oslo, N-0442
Norway
+4746410514 (Phone)

HOME PAGE: http://www.bi.edu/research/employees/?ansattid=a0510249

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