RFS Advance Access originally published online on December 12, 2007
Review of Financial Studies 2008 21(6):2825-2855; doi:10.1093/rfs/hhm058
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The New Issues Puzzle: Testing the Investment-Based Explanation
Rice University
University of Rochester and Goldman Sachs Asset Management
University of Michigan and NBER
Address correspondence to Lu Zhang, Finance Department, Stephen M. Ross School of Business, University of Michigan, 701 Tappan, ER 7605 Bus Ad, Ann Arbor MI 48109-1234; and NBER; telephone: (734) 615-4854, fax: (734) 936-0282, e-mail: zhanglu{at}bus.umich.edu.
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Abstract |
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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.
We are grateful to Aydo
an Alti, Yakov Amihud, Michael Barclay, Gennaro Bernile, Michael Bradley, Michael Brandt, Alon Brav, Tim Burch, Sergei Davydenko, Bala Dharan, Chris Downing, Evan Dudley, Espen Eckbo, Jeff Fleming, Luis Garcia-Feijóo, Fangjian Fu, Louis Gagnon, Lorenzo Garlappi, Rick Green, John Griffin, Gustavo Grullon, Jay Hartzell, Burton Hollifield, Gautam Kaul, Ambrus Kecskés, Han Kim, Xi Li, Erik Lie, James Linck, Laura Liu, John Long, Øyvind Norli, Lukasz Pomorski, Jay Ritter, David Robinson, Paul Schultz, Richard Sloan, Laura Starks, Paul Tetlock, Sheridan Titman, S. Viswanathan, Jerry Warner, James Weston, Jeff Wurgler, Wei Yang, seminar participants at Duke University, Queens University, Rice University, Texas A&M University, University of Georgia, University of Miami, University of Michigan, University of Rochester, University of Texas at Austin, University of Toronto, the 2005 UBC Summer Finance Conference, the 2005 European Finance Association Annual Meetings, the 2005 Financial Management Association Annual Meetings, the 2005 Finance and Accounting in Tel-Aviv Conference, and the 2006 CRSP Forum for helpful comments. We are especially grateful to Matt Spiegel (the editor) and anonymous referees for extensive and insightful comments. This paper supersedes our working paper previously titled "Investment-Based Underperformance Following Seasoned Equity Offerings." All remaining errors are our own.
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