The Underreaction Hypothesis and the New Issue Puzzle : Evidence from Japan

This paper investigates the long-term equity performance of Japanese firms issuing convertible debt and equity. We find that issuing firms perform poorly (except for equity rights issues) compared to non-issuing firms even though the stock-price reaction to convertible debt and equity issues is not negative for Japanese firms. This underperformance is strongest for firms issuing public convertible debt. In contrast to the U.S., poor performance is not concentrated in smaller firms and in firms with a high market-to-book ratio. Simple behavioral explanations advanced for the new issue puzzle in the U.S. do not seem consistent with the Japanese experience