r. david mclean, jeffrey pontiff and akiko watanabe - Center for ...

international markets than in the U.S., it is doubtful that share issuance proxies for a risk
factor in the same vein as book-to-market and size in the U.S. Share issuance may still reflect
rational asset pricing, although its contribution to expected returns is likely to be through a
non-risk based avenue, such as providing compensation for taxes or transaction costs.
The relation between book-to-market and issuance runs counter to market-timing
literature that uses book-to-market as a proxy for mispricing (Lakonishok, Shleifer, and
Vishny (1994)). Counter to this literature, Table 2 shows that high book-to-market firms
tend to issue more stock.
We find that firms are more likely to issue shares after having had high past returns,
and that this result is stronger for small firms. This finding is consistent with both the U.S.
evidence and with market timing theories. However, high past returns could be the result of
improved investment opportunities, and smaller firms may be more dependent on equity
financing than large firms. Therefore, capital raising for legitimate investment opportunities
could also explain the observed relation between past returns and share issuance.
3. Effects of Positive and Negative Share Issuances
Previous studies have investigated long-run returns following specific events that
affect shares outstanding, such as seasoned-equity offerings (Loughran and Ritter (1995))
and stock-financed mergers (Loughran and Vigh (1997)). Fama and French (2007) compare
issuance-return predictability based on the whether the firm is an issuer or repurchaser, and
the magnitude of the respective activity. Motivated by the results in these studies, we test
whether positive and negative issuances can separately predict returns across non-U.S. firms.
Our investigation varies from the repurchase literature in that our issuance variable measures
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