IPOs = negative returns

Doug Henwood dhenwood at panix.com
Sat Aug 21 09:20:34 PDT 1999


"The Equity Share in New Issues and Aggregate Stock Returns"

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



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