The New Issues Puzzle: Testing the Investment-Based Explanation

Lyandres, Evgeny; Sun, Li; Zhang, Lu

doi:10.1093/rfs/hhm058

Cited by 459 publications

(310 citation statements)

References 49 publications

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“…High IA firms earn lower average returns than low IA firms (Lyandres, Sun, andZhang (2008), Chen, et al (2010)). We measure IA as the annual change in gross property, plant, and equipment (WorldScope 02301) plus the annual change in inventory (WorldScope 18196) divided by lagged total assets.…”

Section: B Construction Of Anomaly Variablesmentioning

confidence: 99%

Equity Anomalies and Idiosyncratic Risk Around the World

Fan¹,

Opsal²,

Yu³

2015

MFJ

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In this study, we examine how idiosyncratic risk is correlated with a wide array of anomalies,including asset growth, book-to-market, investment-to-assets, momentum, net stock issues, size, and total accruals, in international equity markets. We use zero-cost trading strategy and multifactor models to show that these anomalies produce significant abnormal returns. The abnormal returns vary dramatically among different countries and between developed and emerging countries. We provide strong evidence to support the limits of arbitrage theory across countries by documenting a positive correlation between idiosyncratic risk and abnormal return. It suggests that the existence of these well-known anomalies is due to idiosyncratic risk. In addition, we find that idiosyncratic risk has less impact on abnormal return in developed countries than emerging countries. Our results support the mispricing explanation of the existence of various anomalies across global markets. (JEL: G12, G15) Keywords: anomalies, idiosyncratic risk, international equity markets, limits of arbitrage * Corresponding author, Tel: 1-262-472-6943, Email: fanz@uww.edu. We received valuable comments and suggestions from three anonymous referees and editors Panayiotis C. Andreou and Panayiotis Theodossiou. All mistakes and errors remain to be our own responsibility.

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Section: B Construction Of Anomaly Variablesmentioning

confidence: 99%

Equity Anomalies and Idiosyncratic Risk Around the World

Fan¹,

Opsal²,

Yu³

2015

MFJ

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“…This evidence has stimulated debate about the methodology of longrun abnormal return tests and the choice of risk factor benchmarks (e.g., Fama (1998), Loughran and Ritter (2000), and Lyandres, Sun, and Zhang (2008)). In contrast, evidence that the firm-level debt versus equity composition of net financing does not predict future returns has been interpreted as opposing the hypothesis that issuance choices are designed to exploit mispricing (Butler et al (2011)).…”

Section: Existing Empirical Approaches To Misvaluation and Financing mentioning

confidence: 99%

Overvalued Equity and Financing Decisions

2012

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We test whether and how equity overvaluation affects corporate financing decisions using an ex ante misvaluation measure that filters firm scale and growth prospects from market price. We find that equity issuance and total financing increase with equity overvaluation; but only among overvalued stocks; and that equity issuance is more sensitive than debt issuance to misvaluation. Consistent with managers catering to maintain overvaluation and with investment scale economy effects, the sensitivity of equity issuance and total financing to misvaluation is stronger among firms with potential growth opportunities (low book-to-market, high R&D, or small size) and high share turnover. Overvalued Equity and Financing DecisionsWe test whether and how equity overvaluation affects corporate financing decisions using an ex ante misvaluation measure that filters firm scale and growth prospects from market price. We find that equity issuance and total financing increase with equity overvaluation; but only among overvalued stocks; and that equity issuance is more sensitive than debt issuance to misvaluation. Consistent with managers catering to maintain overvaluation and with investment scale economy effects, the sensitivity of equity issuance and total financing to misvaluation is stronger among firms with potential growth opportunities (low book-to-market, high R&D, or small size) and high share turnover.

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“…However, they found no evidence of decline in subsequent market returns after IPOs, unlike many prior studies (Ritter1991; Loughran and Ritter, 1995;andSpiess andAffleck-Graves, 1995, 1999;Lyandres et al, 2008). While IPO issuance has a significantly negative effect on the return momentum, the degree of effect is indifferent to the issuing size.…”

Section: A Ipos In Chinese Marketsmentioning

confidence: 62%

The Information Effect of Time-span and Magnitude of Returns on Underpricing, Volume and Cycles in the IPO Market: An Empirical Analysis on Chinese Stock Market

Tan¹,

Kim²

2016

Glob Bus Financ Rev

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A B S T R A C TThis study addresses two puzzles in the IPO markets in China: whether underpricing in the IPO market is affected by earlier market information, especially the volume and number of IPOs in the prior period, and whether underpricing in the previous period leads to a subsequent hot period in the IPO markets in China.The main results of this study are as follows. First, while that the magnitudes of weighted (equally or value weighted) IPO volumes in the past have a positive effect on the magnitude of IPO returns in the future, the IPO volume itself has a negative effect on the magnitude of IPO returns in the future. Second, the magnitude of weighted IPO returns in the past has a positive effect on the magnitude of IPO returns, while simultaneously reflecting the effects of both time-span and magnitude in returns and volume. Third, as higher market returns and larger numbers of IPOs only result in more IPOs in the subsequent period during the period before 2004, whereas this phenomenon has since reversed.

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The New Issues Puzzle: Testing the Investment-Based Explanation

Cited by 459 publications

References 49 publications

Equity Anomalies and Idiosyncratic Risk Around the World

Equity Anomalies and Idiosyncratic Risk Around the World

Overvalued Equity and Financing Decisions

The Information Effect of Time-span and Magnitude of Returns on Underpricing, Volume and Cycles in the IPO Market: An Empirical Analysis on Chinese Stock Market

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