Is the new issue puzzle real? Evidence from implied cost of capital

Snow Han

International Journal of Managerial Finance, 2021, vol. 18, issue 3, 488-509

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 thanex postrealized returns, as proxy forex anteexpected 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 thatex postrealized returns are a noisy proxy forex anteexpected returns, especially for newly listed firms with limited information.

Keywords: IPO; Cost of capital; Earnings; Volatility (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:ijmf-09-2020-0494

DOI: 10.1108/IJMF-09-2020-0494

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