Article2007

The New Issues Puzzle: Testing the Investment-Based Explanation

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Financial Markets and Investment Strategies Corporate Finance and Governance Financial Analysis and Corporate Governance

Abstract

An investment factor, long in low-investment stocks and short in high-investment stocks, helps explain the new issues puzzle. Adding the investment factor into standard factor regressions reduces the SEO underperformance by about 75%, the IPO underperformance by 80%, the underperformance following convertible debt offerings by 50%, and Daniel and Titman's (2006) composite issuance effect by 40%. The reason is that issuers invest more than nonissuers, and the investment factor earns a significantly positive average return of 0.57% per month.

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References

1993Common risk factors in the returns on stocks and bonds 1973Risk, Return, and Equilibrium: Empirical Tests 1996Multifactor Explanations of Asset Pricing Anomalies 1995The New Issues Puzzle 1991The Long‐Run Performance of initial Public Offerings 1997Detecting long-run abnormal stock returns: The empirical power and specification of test statistics 1998Market efficiency, long-term returns, and behavioral finance1The comments of Brad Barber, David Hirshleifer, S.P. Kothari, Owen Lamont, Mark Mitchell, Hersh Shefrin, Robert Shiller, Rex Sinquefield, Richard Thaler, Theo Vermaelen, Robert Vishny, Ivo Welch, and a referee have been helpful. Kenneth French and Jay Ritter get special thanks.1 2001Prospect Theory and Asset Prices

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