The share of equity issues in total new equity and debt issues is a strong predictor of U.S. stock market returns between 1928 and 1997. When the equity share in new issues is in the bottom historical quartile (below 0.14), the average value-weighted market return in the next year is 14%. When it is in the top quartile (above 0.27), the average return in the next year is ?6%. The equity share has stable predictive power in both the first and second half of the sample, and after controlling for other known predictors. We do not find support for efficient market explanations of the results. Instead, the fact that the equity share sometimes predicts significantly negative market returns suggests inefficiency, and that firms time the market component of their returns when issuing securities.
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Find related papers by JEL classification: G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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