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

Abstract

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