(Market efficiency—patterns) The “new issue puzzle” is a phenomenon according to which the returns from investing in firms that issue stocks is lower than other stocks 5 years after the date of the issue. Ritter (who originally reported the phenomenon) argues that it is because investors are too optimistic about the performance of issuing stocks.

a. Is Ritter’s explanation consistent with market efficiency?

b. Can you think of an explanation that is consistent with market efficiency that will explain the new issue puzzle?