This eventuality could happen if investors do not understand the informational content of the RRI. Indeed, if investors believe that the RRI is driven by the firm's performance, even when it is actually being driven by the concurrent market performance, then they might believe that the firm will perform well in the future even though market performance is expected to be poor.
(7) As such, a low RRI could be a reflection of the elevated late round valuations of good quality firms, which would outperform the low quality firms in the long run.
RRI [equivalent to] Ln[1 + EAR] = Ln[1 + ([V.sub.file] - [V.sub.vc])/[V.sub.vc] x (365/n)] (1)
Figure 1 plots the mean and median RRI and the number of IPOs for each year between 1991 and 2006.
Table 2 reports the equal and value-weighted style-adjusted buy-and-hold returns of high, mid, and low RRI portfolios, as well as a high minus low RRI zero-investment portfolio and all IPOs, for the 3- to 5-year period after the offer.
When examining the individual low/mid/high RRI portfolio returns, I find that most of this underperformance is concentrated among high-RRI firms.
In this subsection, I report calendar-time factor-adjusted performance of high and low RRI portfolios as well as a high minus low RRI zero-investment portfolio and all IPOs.
While they are in the sample, IPOs are assigned to a high or low RRI portfolio as they become public.
In Panel A, the 3-factor intercept for the equal-weighted high minus low RRI zero-investment portfolio is -1.42% (significant at the 5% level), indicating that the high-RRI portfolio underperforms the low-RRI portfolio by 17.04% (1.42% x 12 months) over the year during which firms are in the sample.
In Panel B, where explicit transaction costs are taken into account, the 3-factor intercept for the equal-weighted high minus low RRI zero-investment portfolio is -1.31% (significant at the 5% level), indicating that the high RRI portfolio underperforms the low RRI portfolio by 15.72% (1.31% x 12 months) over the year during which firms are in the sample.