Swedroe: Issuing Securities Hurts Returns

July 31, 2017

IPOs involve a great deal of uncertainty, which makes them riskier. As a result, investors should demand higher expected returns as compensation for that greater risk.

However, a large body of evidence demonstrates that, unless you are sufficiently well-connected (specifically, to a broker-dealer who is part of the issuing syndicate) to receive an allocation at the IPO price, IPOs have underperformed the overall market.

The poor risk-adjusted performance of IPOs raises the related question of how well the stocks of frequent issuers (both of stocks and bonds) perform.

Recent Research

Rongbing Huang and Jay Ritter contribute to the literature on this subject with their March 2017 study, “The Puzzle of Frequent and Large Issues of Debt and Equity.”

Using U.S. firms’ equity and debt issuance information for the prior three fiscal years from 1974 through 2014, Huang and Ritter documented the importance of the number of issues, issue size, how recently issues occurred, type of security issued and number of types of securities issued in explaining stock returns in the subsequent year.

Following is a summary of their key findings:


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