The New Issues Puzzle : Testing the Investment-Based Explanation

An investment factor, long in low investment stocks and short in high investment stocks, helps explain the new issues puzzle. Adding this factor into standard factor regressions reduces substantially the magnitude of the underperformance following equity and debt offerings and the composite issuance effect. The reason is that issuers invest more than nonissuers, and the low-minus-high investment factor earns a significant average return of 0.57% per month. Our evidence lends support to the real options theory, in which investment extinguishes risky expansion options, and the lt;igt;qlt;/igt;-theory of investment, in which firms with low costs of capital invest more