The New Issues Puzzle




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    • Loughran is from the University of Iowa. Ritter is from the University of Illinois at Urbana-Champaign. We would like to thank Laurie Simon Bagwell, Christopher Barry, Randolph Beatty, Louis Chan, Robert Chirinko, Kent Daniel, Harry DeAngelo, Eugene Fama, Wayne Ferson, Kathleen Weiss Hanley, Robert S. Hansen, David Ikenberry, Sherry Jarrell, Josef Lakonishok, Inmoo Lee, Roni Michaely, Wayne Mikkelson, Stewart Myers, Dennis Sheehan, René Stulz, Michael Vetsuypens, Jerold Warner, Ivo Welch, Karen Wruck, Luigi Zingales, an anonymous referee, and seminar participants at the following institutions: Boston College, the University of California-Irvine, UCLA, Chicago, Colorado, Georgia Tech, Harvard, Illinois, Indiana, Iowa, London Business School, MIT, McMaster, Missouri, the National Bureau of Economic Research, Notre Dame, Ohio State, Oklahoma, Penn State, Pittsburgh, Purdue, Rice, Texas A & M, Texas Christian, Tulane, the University of Washington, the May 1993 CRSP Seminar, and the June 1994 Western Finance Association meetings for useful suggestions. Some of the data on SEOs have been supplied by Robert S. Hansen and Dennis Sheehan. Eugene Fama has supplied us with a time series of factor realizations. We would like to thank James Davis, Inmoo Lee, and Quan Shui Zhao for excellent research assistance. An earlier version of this article was circulated under the title of “The Timing and Subsequent Performance of New Issues”.


Companies issuing stock during 1970 to 1990, whether an initial public offering or a seasoned equity offering, have been poor long-run investments for investors. During the five years after the issue, investors have received average returns of only 5 percent per year for companies going public and only 7 percent per year for companies conducting a seasoned equity offer. Book-to-market effects account for only a modest portion of the low returns. An investor would have had to invest 44 percent more money in the issuers than in nonissuers of the same size to have the same wealth five years after the offering date.