BY: MALCOLM P. BAKER
Harvard University
JEFFREY WURGLER
Yale School of Management
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=172548
Date: July 28, 1999
Contact: JEFFREY WURGLER
Email: Mailto:jeffrey.wurgler at yale.edu
Postal: Yale School of Management
Box 208200
New Haven, CT 06520 USA
Phone: (203)432-6309
Co-Auth: MALCOLM P. BAKER
Email: Mailto:mbaker at hbs.edu
Postal: Harvard University
Harvard Business School
Morgan Hall 492B
Soldiers Field Road
Boston, MA 02163 USA
ABSTRACT:
The share of equity issues in total new equity and debt issues
is a strong predictor of U.S. stock market returns between 1928
and 1997. When the equity share in new issues is in the bottom
historical quartile (below 0.14), the average value-weighted
market return in the next year is 14%. When it is in the top
quartile (above 0.27), the average return in the next year is
-6%. The equity share has stable predictive power in both the
first and second half of the sample, and after controlling for
other known predictors. We do not find support for efficient
market explanations of the results. Instead, the fact that the
equity share sometimes predicts significantly negative market
returns suggests inefficiency, and that firms time the market
component of their returns when issuing securities.
JEL Classification: G12, G14, G32