Ch. 6: Security Offerings 361
This discussion points to the futility of using non-issuing firms matched on size and
book-to-market ratio to benchmark risk. This may not be surprising when one considers
that issuers self-select both the timing and type of security to issue. The similarity in
firm size and book-to-market ratio notwithstanding, firms that decide to issue and invest
are likely to be in a different economic state and at different points in their life cycle
than firms that either do not invest or use internal equity to finance investment.
The empirical asset pricing approach allows a more consistent and plausible way of
identifying and correcting for the true risk exposures of issuers. While we lack a unified
asset pricing theory with a priori identifiable factors, there is ample evidence that large
portfolios that in addition to market risk captures firm characteristics such as equity
size, book-to-market ratio, return momentum and (perhaps) liquidity, explain a signifi-
cant portion of the cross-section of expected stock return. Using these portfolios as risk
factors, the difference between the average returns to issuers and non-issuing matched
firms become negligible. Thus, the joint hypothesis of the risk model and market ef-
ficiency in pricing new securities issues cannot be rejected at conventional levels of
confidence. We provide a broad update of this result across several types of new issues,
such as public and private placements of equity and different types of debt issues. Over-
all, this part of the survey leads us to conclude that the long-run performance literature
to date fails to provide systematic evidence in favor of behavioral models of either issuer
or market behavior.
Research on security offerings continues to advance rapidly. It is currently being
strongly influenced by advances in asset pricing theories, market microstructure, opti-
mal capital structure and financing theories, theories of corporate governance, agency
and optimal contracting. The development of new databases on security offerings out-
side the U.S. and of various fixed income and hybrid securities in the U.S. and elsewhere
is also stimulating new empirical research on security offerings. At the same time, re-
searchers are incorporating more institutional features regarding laws, regulations, taxes
and political considerations into their analyses of the security offering process. The end
result is a much richer understanding of the complexities of the security offering process
and how much we still need to learn.
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