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Replication, Update, and Extension of Loughran and Ritter's - BEAR

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Table 5<br />

Underperformance <strong>of</strong> SEOs by issue volume, 1973 to 1996<br />

The sample period is January 1973 to December 1996 (288 months). The dependent<br />

variable is the equally weighted monthly percentage return on a portfolio <strong>of</strong> SEOs that<br />

have gone public during the prior 36 months. A coefficient <strong>of</strong> -0.39 represents<br />

underperformance <strong>of</strong> 39 basis points per month. rpt - rft is the excess return over the riskfree<br />

rate on a portfolio in time period t, rmt - rft is the realization <strong>of</strong> the market risk<br />

premium in period t, SMBt is the return on a portfolio <strong>of</strong> small stocks minus the return on<br />

a portfolio <strong>of</strong> big stocks in period t, <strong>and</strong> HMLt is the return on a portfolio <strong>of</strong> value stocks<br />

minus the return on a portfolio <strong>of</strong> growth stocks in period t. The Fama-French factor<br />

returns are supplied by Kenneth French, using “research factors” with annual<br />

rebalancing, as distinct from “benchmark factors” with quarterly rebalancing. Purged<br />

(decontaminated) HML <strong>and</strong> SMB factors have been constructed after purging from the<br />

universe <strong>of</strong> firms all stocks that publicly issued equity for cash during the prior five years,<br />

or have been CRSP-listed for less than five years. The 144 months when the ratio <strong>of</strong><br />

recent equity issuers (IPOs + SEOs) to the total number <strong>of</strong> domestic operating firms on<br />

CRSP is highest are defined as high-volume markets. The other 144 months are<br />

designated as low-volume markets. The first row <strong>of</strong> each panel uses all months, the<br />

second row uses months with low-volume markets, <strong>and</strong> the third row uses months with<br />

high-volume markets. T-statistics are in parentheses.<br />

Panel A: The Fama – French method, SEOs<br />

rpt – rft = a + b(rmt – rft) + sSMBt + hHMLt+ ept<br />

a b t s t h t R 2 adj<br />

All -0.39 1.15 1.03 -0.13 96%<br />

(-4.57) (54.37) (32.60) (-3.77)<br />

Low volume markets -0.33 1.16 1.02 -0.12 95%<br />

(-2.40) (35.51) (19.56) (-2.13)<br />

High volume markets -0.44 1.14 1.02 -0.14 97%<br />

(-4.27) (41.80) (24.99) (-3.10)<br />

Panel B: HML <strong>and</strong> SMB are purged <strong>of</strong> new issues, SEOs<br />

All -0.52 1.21 1.03 -0.12 94%<br />

(-5.26) (50.97) (26.89) (-2.66)<br />

Low volume markets -0.36 1.21 1.01 -0.10 94%<br />

(-2.38) (35.61) (17.50) (-1.44)<br />

High volume markets -0.68 1.21 1.04 -0.13 94%<br />

(-5.15) (36.00) (19.04) (-2.11)<br />

6

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