The Puzzle of Frequent and Large Issues of Debt and Equity Rongbing Huang and Jay R. Ritter
Journal of Financial and Quantitative Analysis (forthcoming)
Overview Larger, more frequent, and more recent debt and equity issues in three consecutive fiscal years are followed by lower stock returns in the subsequent year. The value-weighted (VW) averages of raw returns during the next year are 12.2% for firms with no significant external financing in the prior three fiscal years; 10.8% for firms that issued debt or equity only once; 3.9% for firms that issued debt or equity at least three times; and -1.2% for firms with at least three large issues. The q-factor model time-series regression intercept from 1975 to 2018 decreases in the subsequent year from 0.12% per month (t-statistic=2.88) for the VW portfolio of firms with no external financing in the prior three years to -0.00%, -0.32%, and -0.63% per month (t-statistics= -0.08, -2.54, and -4.31), for the VW portfolios of firms with one debt or equity issue, three or more equity or debt issues, and at least three large issues, respectively. Purging the factor returns of recent issuers increases the magnitude of the estimated underperformance following frequent equity issues. A value-weighted Fama-MacBeth regression shows that firms with three equity issues underperform non-issuers by 0.65% per month (t-statistic =-2.65). Earnings announcement returns are low following frequent issues, especially equity issues.
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