Seasoned public offerings: Resolution of the "new issues puzzle"

Abstract

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.