Seasoned public offerings: resolution of the 'new issues puzzle'

The 'new issues puzzle' is that stocks of common stock issuers subsequently underperform nonissuers matched on size and book-to-market ratio. With 700 0 + seasoned equity and debt issues, we document that issuer underperforman ce reflects lower systematic risk exposure for issuing firms relative to th e matches. A consistent explanation is that, as equity issuers lower levera ge, their exposures to unexpected inflation and default risks decrease, thu s decreasing their stocks' expected returns relative to matched firms. Equi ty issues also significantly increase stock liquidity (turnover), again low ering expected returns relative to nonissuers. We conclude that the 'new is sue puzzle' is explained by a failure of the matched-firm technique to prov ide a proper control for risk. This conclusion is robust to issue character istics and the choice of factor model framework. (C) 2000 Elsevier Science S.A, All rights reserved. JEL classification: G12; G14; G32.