The New Issues Puzzle

Jay Ritter, Tim Loughran

Research

29 Pages

The authors examine why companies issuing stock from 1970 through 1990 delivered unusually weak five year returns. They find that both initial and seasoned issuers lagged comparable nonissuers, while standard explanations such as market risk, valuation, and prior performance resolved only part of the puzzle.

Key Takeaways

Issuer Underperformance: IPOs earned average annual returns of 5% over five years, while seasoned equity issuers earned 7%.
Substantial Wealth Gap: Investors needed to place 44% more money in issuers to match the five year wealth produced by comparable nonissuers.
Broad Sample Evidence: The analysis covers 4,753 IPOs and 3,702 seasoned equity offerings completed between 1970 and 1990.
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