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

  • Jun-Koo Kang
  • Yong-Cheol Kim
  • Rene M. Stulz

This paper investigates the long-term performance of Japanese firms issuing convertible debt or equity. We find that these firms perform poorly even though the stock-price reaction to convertible debt and equity issue announcements is not significantly negative for Japanese firms and Japanese firms do not issue equity or convertible debt following strong positive abnormal returns. Whereas in the U.S. underperformance appears to be concentrated in the smaller firms and in the firms with a high market-to-book ratio, this is not the case in Japan. The underperformance of Japanese issuing firms cannot be understood in terms of the underreaction hypothesis that some have advanced as an explanation for the poor returns of U.S. issuing firms.

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File URL: http://www.nber.org/papers/w5819.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5819.

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Date of creation: Nov 1996
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Publication status: published as Kang, J. K., Y. C. Kim and R. M. Stulz. "The Underreaction Hypothesis And The New Issue Puzzle: Evidence From Japan," Review of Financial Studies, 1999, v12(3,Fall), 519-534.
Handle: RePEc:nbr:nberwo:5819
Note: AP CF
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. David Ikenberry & Josef Lakonishok & Theo Vermaelen, 1994. "Market Underreaction to Open Market Share Repurchases," NBER Working Papers 4965, National Bureau of Economic Research, Inc.
  2. Chan, Louis K C & Hamao, Yasushi & Lakonishok, Josef, 1991. " Fundamentals and Stock Returns in Japan," Journal of Finance, American Finance Association, vol. 46(5), pages 1739-64, December.
  3. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  4. Kang, Jun-Koo & Kim, Yong-Cheol & Park, Kyung-Joo & Stulz, René M., 1995. "An Analysis of the Wealth Effects of Japanese Offshore Dollar-Denominated Convertible and Warrant Bond Issues," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(02), pages 257-270, June.
  5. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
  6. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
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