Seasoned public offerings: Resolution of the "new issues puzzle"
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The `new issues puzzle' is that stocks of common stock issuers subsequently underperform non-
issuers matched on size and book-to-market ratio. With 7,000+ seasoned equity and debt issues,
we document that issuer underperformance re
ects lower systematic risk exposure for issuing
firms relative to the matches. As equity issuers lower leverage, their exposures to unexpected
in
ation and default risks decrease, thus decreasing their stocks' expected returns relative to
matched firms. Also, equity issues significantly increase stock liquidity (turnover) which also
lowers expected returns relative to non-issuers. Our conclusions are robust to issue characteris-
tics, to \decontamination" of factor portfolios, and to model specifications.