The underreaction hypothesis and the new issue puzzle: Evidence from Japan

This article investigates the long-term equity performance of Japanese firm s issuing convertible debt and equity, We find that issuing firms perform p oorly (except for equity rights issues) compared to nonissuing firms even t hough the stock-price reaction to convertible debt and equity issues is not negative for Japanese firms. This underperformance is strongest for firms issuing public convertible debt. Ln contrast to the United States, poor per formance is not concentrated in smaller firms and in firms with a high mark et-to-book ratio. Simple behavioral explanations advanced for the new issue puzzle in the United States do not seem consistent with the Japanese exper ience.