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

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Panels C and D of Table 8 show that the issuance effect is stronger in countries with better investor protection laws, and in countries with better earnings quality. We first describe the results in Panel C, which reports the monthly holding period return regression results. In the first regression, the interaction term is a dummy variable equal to one if the country is a common law country. The interaction term -0.96 (t-statistic = -5.58) and the ISSUE coefficient is -0.43 (t-statistic = -3.56). Hence in a civil law country, the average ISSUE coefficient is -0.43, while in common law countries it is -1.39. Regressions 2, 3, and 6 reinforce the notion that the issuance effect is stronger in countries which offer greater investor protection. The coefficients are negative and significant for the Accounting, Liability, and Protect interaction terms. The t-statistics range from -3.96 to -4.64. In regression 2 the Criminal interaction term is positive, but not significant. Regression 6 shows that the issuance effect is stronger in countries with better earnings quality, and weaker in countries with poor earnings quality. Leuz et al. (2003) show that earnings quality is better in countries with that offer better investor protection, so the results here again show that the issuance effect is stronger in countries with stronger investor protection laws. Panel D of Table 8 reports the regression results with the 1-year holding period. The signs and significance for each of the interaction terms are the same as in Panel C, showing that the issuance effect is stronger in countries that offer better investor protection and in countries that have better earnings quality. The results in Table 8 are not consistent with the hypothesis that markets with greater investor protection are more efficient than markets that offer less protection. La Porta et al. 25
(2006) show that better governed countries have more developed equity markets, and provide firms with easier access to equity capital. This would suggest that it is easier to for firms to issue and repurchase mispriced shares in markets that offer better investor protection, so the results here could be consistent with market timing. 5. Conclusion In this paper we take a first look at the return predictive ability of firm-level share issuance in international markets. We study the issuance effect across a large sample of non- U.S. firms, drawn from 41 different countries over a 25 year period. We find robust evidence of a share issuance effect in our sample. The predictive ability of annual issuance is generally more statistically significant than that of either size or momentum, and is similar to that of book-to-market. The international issuance effect is especially strong for positive share issuances. A comparison of our results to those in Fama and French (2007) shows that positive share issuance events have a stronger effect on subsequent returns internationally than they do in the U.S. Like in the U.S., international negative issuances also predict high returns, but the international buyback effect is weaker than that from positive issuances, and weaker than the buyback effect found in the U.S. The predictive ability of share issuance provides challenges for rational asset pricing models as well as behavioural models. We find that cross-sectional average R 2 s from regressions of returns on issuance are very low, casting doubt on a rational risk-based link, although we can not rule out the possibility that issuance proxies for a rational non-risk based factor, such as taxes or transaction costs. 26
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 and 12: 2.3. Share Issuance and Future Retu
Page 13 and 14: the regressions. They are also grea
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: ISSUE coefficient is -0.70. Taken t
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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