Is the new issue puzzle real? Evidence from implied cost of capital
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 27 July 2021
Issue publication date: 11 May 2022
Abstract
Purpose
This study aims to provide new explanation of the new issue puzzle.
Design/methodology/approach
This study uses market implied cost of capital (ICC), rather than ex post realized returns, as proxy for ex ante expected returns, and sheds new light on the question why initial public offering (IPO) firms underperform the market within a 3–5 years period after the offerings.
Findings
Using ICC, the author finds that the market expects to earn higher risk premium for new listing firms than similar firms, which is contradictory to the documented new issue puzzle. The higher expected returns come from higher idiosyncratic volatility for newly listed firms, which are young and have more growth opportunities. The author also reports that investors are negatively surprised by lower-than-expected performances of newly listed firms.
Originality/value
The author’s results provide new empirical evidence that the new issue puzzle does not exist. Previous results observed IPO firms' under-performance is attributable to that ex post realized returns are a noisy proxy for ex ante expected returns, especially for newly listed firms with limited information.
Keywords
Citation
Han, S. (2022), "Is the new issue puzzle real? Evidence from implied cost of capital", International Journal of Managerial Finance, Vol. 18 No. 3, pp. 488-509. https://doi.org/10.1108/IJMF-09-2020-0494
Publisher
:Emerald Publishing Limited
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