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Rev Fin 1999; 12:519-534
© 1999 the Society for Financial Studies

Article

The underreaction hypothesis and the new issue puzzle: evidence from Japan

JK Kang, YC Kim and RM Stulz1
Michigan State University, USA
Clemson University, SC, USA
1 Corresponding author at: Fisher College of Business, Ohio State University, 2100 Neil Avenue, Columbus, OH 43210-1399, USA

Abstract

This article investigates the long-term equity performance of Japanese firms issuing convertible debt and equity. We find that issuing firms perform poorly (except for equity rights issues) compared to nonissuing firms even though the stock-price reaction to convertible debt and equity issues is not negative for Japanese firms. This underperformance is strongest for firms issuing public convertible debt. In contrast to the United States, poor performance is not concentrated in smaller firms and in firms with a high market-to-book ratio. Simple behavioral explanations advanced for the new issue puzzle in the United States do not seem consistent with the Japanese experience.


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