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egression that includes only the ISSUE variable, Pontiff and Woodgate (2006) find its slope to be -2.23; this indicates that a standard deviation increase (0.15) in annual issuance is associated with a 0.33% decline in the subsequent month’s cross-sectional returns in the U.S. A similar comparison made for the 1-year holding period also shows that the continuous annual issuance measure exhibits a stronger economic effect on future returns in the U.S. than in non-U.S. countries. 2.4. The Impact of Size, Book-to-Market, and Momentum on the Share Issuance Effect To test the robustness of the international issuance effect, we include size (ME), book-to-market (BM), and momentum (MOM) as control variables in the regressions. We report these results in Panels C and D of Table 4. Controlling for these effects is important since they exist in international markets (see Fama and French (1998), Rouwenhorst (1998, 1999), and Griffin, Ji, and Martin (2003)). Overall, we observe that the effects of ISSUE are robust to the inclusion of other firm- specific variables. The issuance measure has significant negative coefficients in all twelve regressions reported in Panels C and D, and the effect remains similar in both economic magnitude and statistical significance as compared to the results in Panels A and B. These results are similar to those reported in Pontiff and Woodgate (2006) and Fama and French (2007), who find that the U.S. issuance effect remains pervasive after controlling for other firm characteristics known to affect future returns. The results in Panels C and D show that the statistical significance of issuance compares favourably to those of other firm-specific variables. The t-statistics for the ISSUE slopes are considerably larger than those for ME and comparable to those for BM throughout 11
the regressions. They are also greater than those for MOM in both the value- and scaled- weighted regressions. 2.6. Discussion Based on our analysis, we offer several additional observations and interpretations of our results. First, we observe large differences in average R 2 statistics resulting from the same regression specification estimated with and without country dummies. For example, the average R 2 statistics are mostly 20% and above in Panel A of Table 4 (with country dummies), whereas they are at most 0.30% in Panel B of the same table (without country dummies). The R 2 statistic tells us how much stock-return variation is associated with the variation in the explanatory variables. Therefore, this difference in average R 2 suggests that country effects alone can explain about 20% of the cross-sectional variation in international stock returns. A comparison of the results from the same regression that differs only in terms of country-dummy usage also shows that the t-statistics on the ISSUE coefficients are larger when the dummies are used. This finding indicates that the return predictive ability of share issuance tends to be more robust within a country than across countries. Annual share issuance alone explains very little of the cross-sectional variation in international stock returns. Across all holding periods, the highest average R 2 is only 0.30%, and is lower in four out of the five holding periods examined by Pontiff and Woodgate (2006). Pontiff and Woodgate show that in the U.S., size, book-to-market, and momentum explain 2-8 times the cross-sectional return variation explained by share issuance. Since the ability of annual issuance to explain cross-sectional return variation is even smaller in 12
Page 1 and 2: Share Issuance and Cross-Sectional
Page 3 and 4: there is a significant issuance eff
Page 5 and 6: correlation to stock returns in an
Page 7 and 8: We use Adjusted Shares to construct
Page 9 and 10: sample. This investigation is motiv
Page 11: 2.3. Share Issuance and Future Retu
Page 15 and 16: actual issuance activity, whereas t
Page 17 and 18: 3.3. Positive and Negative Share Is
Page 19 and 20: and we would also expect these tran
Page 21 and 22: contain firms that more actively is
Page 23 and 24: et al. (2006), who show that countr
Page 25 and 26: ISSUE coefficient is -0.70. Taken t
Page 27 and 28: (2006) show that better governed co
Page 29 and 30: References Baker, Malcolm, and Jeff
Page 31 and 32: Table 1: Summary Statistics for Sam
Page 33 and 34: Table 2: Aggregate Summary Statisti
Page 35 and 36: Table 4: Fama-MacBeth Regressions o
Page 37 and 38: Table 5: Summary Statistics for Por
Page 39 and 40: Panel A Regression (1) (2) (3) (4)
Page 41 and 42: Table 7: Country-Level Issuance, Is
Page 43 and 44: Country Panel B: Governance Variabl
Page 45 and 46: Table 8: Equal-Weighted Fama-MacBet
Page 47 and 48: Panel B: Issuance Activity and Mark
Page 49: Panel D: Governance Interactions: 1

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