The Equity Share in New Issues and Aggregate Stock Returns

Authors

  • Malcolm Baker,

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    • Baker is from Harvard University. Wurgler is from the Yale School of Management. We would like to thank John Campbell, Paul Gompers, Jean Helwege, Owen Lamont, Tim Loughran, Scott Mayfield, Tom McCraw, Jay Ritter, Bob Shiller, Jeremy Stein, René Stulz, seminar participants at Harvard University, the National Bureau of Economic Research, and the Yale School of Management, and especially Andrei Shleifer for helpful comments. We thank Leslie Jeng, S.P. Kothari, Charles Lee, and CDA Weisenberger for providing data. The issues data series transcribed from the Federal Reserve Bulletin are available on Wurgler's home page, currently http://som.yale.edu/~jaw52. This study has been supported by the Division of Research of the Harvard Graduate School of Business Administration.
  • Jeffrey Wurgler

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    • Baker is from Harvard University. Wurgler is from the Yale School of Management. We would like to thank John Campbell, Paul Gompers, Jean Helwege, Owen Lamont, Tim Loughran, Scott Mayfield, Tom McCraw, Jay Ritter, Bob Shiller, Jeremy Stein, René Stulz, seminar participants at Harvard University, the National Bureau of Economic Research, and the Yale School of Management, and especially Andrei Shleifer for helpful comments. We thank Leslie Jeng, S.P. Kothari, Charles Lee, and CDA Weisenberger for providing data. The issues data series transcribed from the Federal Reserve Bulletin are available on Wurgler's home page, currently http://som.yale.edu/~jaw52. This study has been supported by the Division of Research of the Harvard Graduate School of Business Administration.

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. In particular, firms issue relatively more equity than debt just before periods of low market returns. The equity share in new issues has stable predictive power in both halves of the sample period 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.

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