An Empirical Examination of Intended and Unintended IPO

International Research Journal of Finance and Economics ISSN 1450-2887 Issue 20 (2008) © EuroJournals Publishing, Inc. 2008 http://www.eurojournals.com/finance.htm An Empirical Examination of Intended and Unintended IPO Underpricing in Singapore and Malaysia Md Hamid Uddin College of Business Administration, University of Sharjah, United Arab Emirates E-mail: mduddin@sharjah.ac.ae, iba_hu@yahoo.com Tel: +971-6-5050517; Fax: +971-6-5050100 Abstract This paper examines a research question whether IPO initial return that appears on the first trading day after listing on exchange is intended by the issuers and underwriters when the offer price was determined before the listing of IPO. Delay in listing after determining the offer price, a phenomenon in many emerging markets, may result in unintended underpricing on the fist trading day. If it were not possible to determine the offer price at the equilibrium level with appropriate discount, then error in offer price leads to an inefficient primary market, resulting in unintended underpricing to affect both the issuers and investors. A comparative study on Singapore and Malaysia supports the conjecture that delay in IPO listing after setting the offer price results in unintended underpricing. Hence, the listing time lag is an important factor to explain IPO initial returns. Keywords: IPO Underpricing, Initial Returns, Offer price, Listing Time Lag 1. Introduction The initial return earned by investors on the stock listing day has been well accepted in academic literature as the underpricing of initial public offers, which cannot be avoided by the issuers. Researchers offered several theories to argue that underpricing of initial public offers (IPO) is an equilibrium phenomenon in an efficient capital market. That means a certain degree of deliberate IPO underpricing, as intended by the issuers and underwriters, is required for a variety of reasons. It is understandable that if the offer price is set at a level lower than the expected valuation of new shares, then investors would earn a significant rate of initial return on the first trading day of IPO shares. Given the present state of academic knowledge about IPO underpricing, we examine whether the total amount of initial return earned by investors can be considered as deliberate underpricing as intended by the issuers and underwriter. We become motivated to examine this research issue after observing wide variations of IPO initial returns in different countries (Loughran et al., 1994 and Ljungqvist, 2006). Evidence found that Chinese IPOs provide over 300 percent of initial returns and Malaysian IPOs provide about 100 percent, but the US and UK IPOs normally provide about 20 percent of initial returns. This prompts a question why it is necessary for the issuers, in the countries where initial return is very high, to sacrifice such a large portion of corporate wealth while raising new capital. It was suggested that this could be the result of different public offer contractual mechanisms applied in different countries. One dimension of the contractual mechanisms for public offers is the stage of information acquisition International Research Journal of Finance and Economics - Issue 20 (2008) 56 process at which an offer price is fixed. In one extreme, the offer price can be determined at the very initial stage of IPO flotation process with little information gathering prior to listing of stocks on the exchange. In other extreme, the offer price can be determined at the final stage of flotation process when the offer of shares is made to the public after adequate information gathering and IPO stocks are quickly listed on the exchange after offer is closed. In many countries, IPO listing on the exchange is delayed from one day to three months after fixing the offer price (Loughran et al. 1994 p.170). It was found that IPO stocks in Malaysia are listed about 119 days after fixing the offer price, (Uddin, 2001), while in China the average time lag after setting offer price was about 305 days (Tian and Megginson, 2006). Therefore, we suggest that if IPO stocks are not listed on the exchange quickly after fixing the offer price, as it happens in Malaysia, China and other emerging markets, then IPO ex-ante uncertainty increases to require more discounts on the offer price; but it becomes difficult for the issuers and underwriters to estimate the right amount of discounts to be needed. This is because if the offer price is determined long time before the stock listing, IPO market value remains largely unclear at the time of fixing the offer price. The problem becomes worse as the market information gathering long before IPO listing may not be effective. Under this circumstance, the quality of IPO firm and value of stocks become clearer gradually with the dissemination of information from the various sources e.g., analytical market reports, press reports, industry reports, and securities analysts’ reports during the period of time lag after fixing of offer price. Moreover the market condition may also change during the long time gap between the fixing of offer price and the listing of stocks. Despite the difficulties of estimating right amount of offer price discounts needed due to listing delay, the issuers and underwriter are required to propose an offer price for official approval by the securities authority. It is likely that the proposed offer price may reflect the additional ex-ante uncertainty arising from possible delay in listing, but the estimated price discount cannot be not fully based on the fair market valuation of IPO. Therefore, we suggest that the underpricing intended by the issuers and underwriters while fixing the offer price may significantly differ from the actual initial return earned by the investors upon listing of IPO stocks. Hence, we make an attempt to examine the existence of unintended underpricing in the markets where IPOs are not quickly listed after determining the offer price. We empirically examine the existence of intended and unintended IPO underpricing in the Singapore and Malaysia. The Singapore Exchange Limited (SGX) and Kuala Lumpur Stock Exchange (KLSE) are the stocks markets of Singapore and Malaysia respectively. Both markets operated as a single entity since inception in 1930 when securities business started in Malay Peninsula. In 1990, the single entity has been separated into two independent markets for the two countries. After separation, the Singapore market implements massive restructuring of rules and regulations to make the market more transparent and efficient, while the Malaysian market undertakes changes of rules and regulations in the line with the country’s New Economic Policy (NEP) that mandated for wealth redistribution in favor of native investors. Despite that the two markets started from same origin and had tremendous progress after separation, making them major markets in the Asia-Pacific region, a significant difference exists in IPO pricing mechanism. In Singapore, IPOs are priced after proper book building activities undertaken by underwriters (as practiced in developed markets); through some delay in listing (average 16 days) observed after fixing the offer price (Lee et al. (1996a). In Malaysia, IPO proposals are thoroughly scrutinized by the securities authority and the proposed offer price is approved after complying with NEP. Hence, the book building activities are less effective and significant delay in listing (average 119 days) occurs due to complying necessary formalities after obtaining the approval of offer price (Uddin, 2001). The circumstances of two markets with respect to IPO listing delay after setting the offer price provides us an opportunity to examine the existence of intended and unintended underprcing as conjectured above. The empirical findings on intended and unintended underpricing will have both academic and practical implications. If it is found that a portion investors’ initial return was not actually intended by the issuers and underwriters then it may affect the corporate decision regarding the number of shares to be issued for raising required capital. If it were not possible to fix the offer price at the equilibrium level with 57 International Research Journal of Finance and Economics - Issue 20 (2008) appropriate discount then error in offer price will lead to market disequilibrium in demand and supply of IPO shares. If the listings delay is the possible cause of unintended underpricing resulting in offer price error then the securities authority may consider to review their new issue offer pricing and listing procedure to reduce the listing delay after setting the offer price. Findings based on 322 IPOs from Singapore and 539 IPOs from Malaysia, over a period of 11 years after separation of two markets in 1990, show that the investors earned an average of 93.31 percent and 31.73 percent market adjusted initial return respectively in Malaysia and Singapore on the first trading day, but the intended underpricing was around 68.81 percent and 10.33 percent respectively in both countries when the issue offer prices were determined before listing. We find that average unintended underpricing occurs at average 25.81 percent and 18.40 percent respectively in Malaysia and Singapore. The multiple regression results depict that delay in stock listing after setting offer price play an important role in occurring unintended underpricing. The rest of paper is organized as follows: in the next section the literature review is presented. In subsequent four sections, we respectively present the hypotheses, data and methodology, and results and discussions. Finally the conclusion is given in the last section. 2. Literature Review There are enormous amount of theoretical and empirical research conducted over last many years across the different markets in world to find out the reasons for offer price discount required for floating new shares to public. Researchers offer several theories that explain IPO underpricing is an equilibrium phenomenon in an efficient market. The major underpricing theories are developed based on information asymmetry among the IPO parties. These include winner’s curse, signaling, and price delegation models. Among others, underpricing theories are found with involving the changes in firm ownership after the public offer of shares. The explanations of IPO underpricing have also appeared involving the institutional factors that are mostly found in the US market. Because of the evidence of long run underperformance of IPO stocks in many markets, some researchers explained the high initial return of IPO as a temporary phenomenon induced by the fads and investors’ overreactions to the floatation of shares of a company. The winner’s curse theory of Rock (1986) suggests some investors are informed about the value of the firm and other investors, known as uninformed investors, including the issuers and underwriters have little information about issue value. The informed investors only subscribe to issues whose offer prices are lower than the expected market prices. Thus, uninformed investors stand a higher chance of being allocated overpriced issues and, the average initial return conditional upon receiving shares is lower than the average initial return conditional upon submitting a purchase order. The uninformed will not participate in the IPO market if they persistently lose money. Assuming that informed demand does not fully subscribe to the issue, the underwriter has to underprice the issue to induce the uninformed into the market. Moreover, the underpricing also compensates informed investors for their information production. Beatty and Ritter (1986) found that underwriters enforce the required price discount. Koh and Walter (1989), Lee et al. (1996a) and Sherman and Chowdhry (1996) examined and found evidence of the winner’ curse in the U.K., Hong Kong, Singapore, Malaysia, Indonesia, India, Thailand and Bangladesh, among other places. In the signaling models proposed by Allen and Faulhaber (1989), Grinblatt and Hwang (1989) and Welch (1989), the issuers are assumed to have better information about the future cash flows of their firm than the outside investors and the underwriters. Therefore, underpricing is used to signal the quality of the firm in terms of better operating performance and higher cash flows. This helps to establish a separating equilibrium in which the high-value (good) firms are differentiated from the lowvalue (bad) firms. Such a separation will enable the issuers of good firms to fetch a higher price at the seasoned offering, since only good firms are able to recover the initial loss from underpricing. On the other hand, bad firms cannot afford to signal due to the high imitation costs. Keloharju (1993), Michaely and Shaw (1994), Lam (1991). Lee, et. al. (1996a) and Firth and Liau-Tan (1997) examined International Research Journal of Finance and Economics - Issue 20 (2008) 58 the signaling models with data from different markets but evidences of different empirical studies are not consistent to confirm the theory. The price delegation theory of Baron and Holmstróm (1980) and Baron (1979, 1982) argues that the decision of new issue pricing is delegated to the investment banker, so that the offer price can be fixed with better information since it is investment bankers’ business, as underwriter, to bring new issues into market. The banker would determine the offer price based on the best information on the issue demand. If the bankers are risk neutral, they take full responsibility of the pricing decision and fix the offer price with discount. This is because it reduces the risk of issue failure and the marketing costs due to moral hazard problem. Underpricing of the IPO potentially reduces the bankers’ commission income, but the trade-off between the cost and benefit of underpricing results in positive initial return in equilibrium. Muscarella and Vetsuypens (1989), and Michaely and Shaw (1994) empirically examined the theory but evidence does not strongly support the argument of price delegation theory. The three theories of underpricing briefly elaborated above are based on the assumption of informational asymmetry among the IPO parties. Researchers also tried to explain the offer price discount as the equilibrium phenomenon due to certain institutional reasons. For example, Benveniste and Spindt (1989) explained that underpricing is needed to induce the prospective investors to reveal information during pre-selling programs and this explanation of underpricing is supported by the evidence of Hanley (1993) and Loughran et. al.. (1994). Ruud (1993) explain that underpricing is needed to give required price support the IPO investors in aftermarket period, as practiced in the US and many European markets. It was suggested by Brennan and Franks (1997) that underpricing is needed to guard against excessive public monitoring by ensuring a diverse ownership structure after going public, and underpricing helps to achieve diverse ownership if underpriced offer is highly oversubscribed, which is likely. Based on the enormous evidence of the high initial returns of IPOs followed by long run underperformance, Aggarwal and Rivoli (1990) suggested IPO underpricing occurs on the stock listing day due to fads and over optimisms of investors regarding the newly listed stocks. The literature, explaining the IPO underpricing, is well developed, though the empirical evidence is not consistent across the markets, but most theories converge at one point that the initial underpricing is positively related with the degree of IPO ex-ante uncertainty which is overwhelmingly supported by many studies, using different proxy variables (see details in Jenkinson and Ljungqvist, 2001 and Ljungqvist, 2006). The theories and empirical studies on IPO underpricing presented above largely attribute the initial return appears on the listing day is the reflection of underpricing of the public offer. In this paper, however, we examine whether the total amount of underpricing as reflected by the investors’ initial return contains any unintended component, particularly when new issue offer price is fixed much earlier than the day of actual listing and trading on the exchange. The problem of listing delay in different countries was first recognized by Loughran et al., (1994), but Chowdhry and Sherman (1996) later showed that IPO underpricing in the UK, where offer price is fixed some time earlier than the listing of stocks on the exchange, would be higher than that in the U.S. where the stock listing time lag is only one day. This is partly due to more ex-ante uncertainty resulting from listing delay. The effect of listing time lag on underpricing was first empirically examined by Lee at. el. (1996a and 1996b). They found an insignificant negative relationship between the degree of initial return and listing time lag (from the prospectus registration date) in Singapore, but found a significant relationship in Australia. The evidence from Singapore and Australia apparently puzzles us because if the fixation of offer price much earlier then the listing of stocks results in more ex-ante certainty, then underpricing will be higher and the initial return might have depicted a positive relationship with the listing time lag. Later, Uddin (2001) found a significant quadratic relationship between the IPO initial return and listing time lag (after offer price approval by the securities authority) in Malaysia using a large sample of 493 IPOs over a period of 10 years. In the recent past, the listing time lag depicted a significant positive relationship with IPO initial return in China (Chan et. al., 2004). The inconsistent evidence about the effect of listing time lag on IPO initial return supports our conjecture: that the listing time lag could increase IPO ex ante uncertainty, but the issuers and 59 International Research Journal of Finance and Economics - Issue 20 (2008) underwriter may not correctly predict the extent of ex ante uncertainty about IPO valuation. Hence, it is difficult to accept that the level of initial return appeared on the stock listing day was originally intended by the issuers and underwriters. Therefore, a part of the initial return might not been intended when the offer price was fixed long time ago. We examine the intended and unintended IPO underpricing in Singapore and Malaysia. The IPOs in these two markets are well investigated by the earlier researchers although the existence of intended and unintended underpricing has not been examined by any of them. Major studies on Singaporean IPOs include Dawson (1984), Wong and Chiang (1986), Dawson (1987), Koh and Walter (1989), Saunders and Lim (1990), Lee et. al. (1996), and Firth and Liau-Tan (1997), Dawson (2000), Wang et. al. (2002) and Singh and Zahn (2007). These studies largely examined the effects of winner’s curse problem, signaling of issue quality, underwriter reputations, privatization of public firms, venture capital in IPO firms, and disclosure of intellectual capitals on underpricing level. They documented that average underpricing, measured by first trading initial return, ranges from 21 to 50 percents. The major studies with Malaysian IPOs include, Wong and Chiang (1986), Dawson (1987), Isa (1993), Mohamed et. al (1994), Paudyal et. al. (1998), Uddin (2001) Jelic et. al. (2001), and How et. al. (2007). These studies tested the effects of ex-ante uncertainty, signaling of issue quality, privatization of public firms, underwriter reputations, management earnings, share allocation to ethnic indigenous investors on the level of IPO underpricing measured by investors’ initial return, and they documented that initial return ranges from 53 to 167 percents over different periods. 3. Hypotheses The conjecture of intended and unintended underpricing arises from the fact that the new issue prices in many emerging countries are fixed long time before the listing of stocks on the exchange. If the offer price were to be fixed right before the listing of stock (like in the US and other developed markets), then perhaps the issuers and underwriters can better estimate the value of share. Therefore, the level of discount given (intended underpricing) could adequately reflect in the offer price as well as in the initial return earned by the investors, and unintended underpricing will be insignificant. The IPO listings delay, after fixing offer price, occurs both in Singapore and Malaysia. Although both markets start from same origin, the Singapore market followed largely market driven IPO pricing system after separation from Malaysia, while the Malaysian market developed under the new economic plan (NEP) that is mandated to create wealth for the native Malay population. Accordingly, the securities authority seriously scrutinizes the proposed offer price before giving official approval to it. Importantly, listing of IPO is not possible quickly after setting the offer price because selling of shares is allowed only after fulfilling the necessary floatation requirements (see Uddin 2001 for details about IPO pricing and listing procedure in Malaysia). Therefore, prior evidence shows that listing of IPOs usually delays in Malaysia by about 119 days compared to 16 days in Singapore. Longer delay in listing may increase IPO ex ante uncertainty, requiring more discount (intended underpricing), but appropriate level of discount cannot be measured correctly, because market valuation of IPO much earlier then listing is less effective. This results in more unintended underpricing upon listing of stocks. Hence the first hypothesis is constructed as follows. H1: Average IPO underpricing in Malaysia would be significantly higher than that in Singapore due to higher intended underpricing. The unintended underpricing occurs because initial return that appears on the stock listing day could significantly vary from the degree of underpricing intended earlier when the offer price is fixed. While setting offer price, subject to other factors, the issuers and underwriters may estimate a value of offer and give necessary discount on the offer price. If there is a long time lag between the fixing of offer price and listing of stock, the given discount on offer price may become irrelevant. Since the prior studies reveal that listing time lag is longer in Malaysia than that in Singapore, the second hypothesis is constructed as follows: International Research Journal of Finance and Economics - Issue 20 (2008) 60 H2: The average unintended underpricing in Malaysia would be higher that in Singapore due to longer listing time lag. An important reason behind resulting in unintended underpricing is that IPO market condition could be changed during the period of long time lag prior to stock listing. IPO price may be fixed when market is ‘hot’ but the market condition could turn into ‘cold’ when it is listed much later, and vice versa. Hence, the third hypothesis is constructed as follows. H3: The initial returns of IPOs approved in hot period but listed in cold periods would be higher from that of the IPOs approved in cold period but listed in hot period, or vice versa. Actual IPO underpricing that is reflected in initial return consists of intended and unintended components. The listing time lag results in higher ex-ante uncertainty requiring additional discount, but the issuers and underwriters cannot ascertain the right amount of discount required. This is because it is not easy to predict the future market conditions when IPO will be listed later after fulfilling all the requirements. Hence, the initial return revealed on the listing and/or first trading day deviates significantly from the discount considered (intended underpricing) earlier at the time of fixing the offer price. This results in unintended underpricing on the listing day. Therefore, IPO initial return will be affected by the listing delay after fixing the offer price, as unintended underpricing occurs. Hence the fourth hypothesis is constructed as follows. H4: There is a significant relationship between the level of IPO initial return and the listing time lag after fixing the offer price. 4. Data and Methodology We examined above hypotheses using a relatively large sample covering a long period of more than one decade after separation of the two markets. Sample set includes the IPOs listed on the Singapore Exchange Limited (SGX) and Kuala Lumpur Stock Exchange (KLSE) between January 1990 and December 2000. In total, 861 IPOs are examined. The relevant data for empirical tests are obtained from the respective IPO prospectus, SES Journal, Pulses, SES Fact-Book, Investors Digest, SGX and KLSE websites, the New Straits Times, as well as from the DataStream. Most of the above documents are available at the National University of Singapore Library. Some documents regarding Malaysian IPOs are collected from Public Information Centre at KLSE. Data accuracy and errors are checked and corrected before running tests. The aim was to cover all the IPOS listed during the period of study on the two exchanges, but some of the newly listed shares are excluded as they were listed under corporate restructuring program without any public offer. The Level of Underprcing The level of underpricing is assumed to be reflected in the initial return of investors. We adjust the initial return for the market benchmark return, and calculate the market-adjusted initial return (MAIR) as follows: (1) MAIRi = IRi − Rm Where, IRi: raw initial return of stock i calculated as (Pit – Pio)/Pio; where, Pit is the closing price on the first day of trading and Pio is offer price of stock i. Rm: market return for the period from the day approval of IPO price to the day of listing, which is calculated as (It – Io)/Io. Where, It is the closing price of the market index on issue i’s first trading day, Io is the closing price of the market index on the approval day of issue i’s offer price. The Straits Time Index (STI) and the Kuala Lumpur Composite Index (KLCI) are used as the market benchmarks in Singapore and Malaysia respectively. 61 International Research Journal of Finance and Economics - Issue 20 (2008) Intended and Unintended Undepricing The IPO initial return measures the level of ex-post underpricing in the market, but ex-ante estimation of intended underpricing is difficult. This is because the intended underpricing depends on the unobservable expected value of the offer. Lee et al (1996a) used the price-earnings (PE) ratio to measure the level of expected underpricing return for Singapore IPOs if the IPO stocks were trading at the average market PE multiple on its first trading day. We generally observe that the prospective PE ratio of IPOs is usually lower than the average market PE ratio of the industry in which category the IPO firm is listed. Therefore, the presence of intended underpricing (IUP) could be examined by using the variations in the PE ratios, assuming that the IPO firm is not significantly different from the industry characteristics. To examine the presence of IUP, we compare the prospective PE ratio of the IPO firm with the average market PE ratio of the listed companies in the same industrial sector in which the IPO is classified. The PE ratio of listed companies is defined as the closing price divided by the most current earnings per share (EPS) value. However, the prospective PE ratio of the IPO firm is obtained by dividing the relevant offer price by its forecasted EPS value. The prospective PE ratio measures the price that investors will be willing to pay for each future dollar earned by the IPO firm. This variable is appropriate since investors should be prepared to pay similar value for each dollar earned by firms belonging to the same industry. We clean the PE ratios for negative EPS values, abnormally large PE ratios and outliers before calculating the average market PE ratio of the industry. When there is intended underpricing (IUP), we should observe that the PE ratio of the IPO firm is lower than the average market PE ratio of industry. This is to ensure that the new issue would be oversubscribed and thus, termed as a success. Therefore, we expect: A PE ind − PE iA > 0 (2) A Where, PEind is the average of daily industry PE ratio in the week prior to the IPO’s approval date, PEiA is the prospective PE ratio of issue i as stated on the prospectus. One week is used to calculate the average industry PE ratio as it is more representative of the industry condition around the time when the offer price is fixed. If IUP exists, we expect the PE ratio of IPO to increase from its approval date to its listing date on the exchange, that is: PE iL − PE iA > 0 (3) L Where, PEi is the PE ratio of issue i on its listing date. Assuming an efficient market, we anticipate that the PE ratio of the IPO firm should rise to the average market PE of the industry on its listing day. If such a phenomenon is observed, it further substantiates the existence of IUP. Thus, we expect: L PE ind − PE iL = 0 (4) L Where, PEind is the average market PE of industry on the date of IPO listing. In summary, if there is IUP, the following situations are observed: A L PE ind − PE iA > 0 ; PE iL − PE iA > 0 ; and PE ind − PE iL = 0 (5) After examining the above three situations, the level of IUP is estimated based the unobservable expected value of the offer, EVOi of issue i based on which underwriters may consider giving discount while setting the offer price. The EVOi is estimated as follows: A (6) EVOi = PEind × EPS i Where, EPSi is the forecasted earning per share value of issue i as stated in the prospectus. Hence, the level of intended underpricing, IUP, of issue i is computed as follows: [ ] [ ] [ [ ] ] [ ] [ ] IUPi = EVOi − P 0 × 100% EVOi (7) After estimating the level of intended underpricing, IUP, the degree of unintended underpricing, UIUP, is measured as follows: UIUP = MAIR − IUP (8) i i i International Research Journal of Finance and Economics - Issue 20 (2008) 62 Where, UIUPi measures the level of unintended underpricing for the new issue i, MAIR is calculated in equation (1) that measures the market adjusted initial return of the investors, and IUP measures the intended underpricing depicting the discount offered by the issuers and underwriters when fixing the offer price. Hot and Cold Issue Markets It was suggested that unintended underpricing, UIUP, occurs due to listing time lag when the IPO market conditions might be changed from the level as it was around the period when the offer price was fixed. The “hot” and “cold” issue markets are classified using two alternative methods: the first method is based on the number of IPOs issued quarterly and the second is based on the average quarterly market return. A total of 44 quarters over a period between 1990 and 2000 are ranked according to the number of IPOs issued in each quarter (for first method), and also according to the level of quarterly market return (for second method). We define a market as “hot” when the quarter is ranked among the top 33%. Conversely, a “cold” market is one when the quarter is ranked among the bottom 33%. A market is “normal” if the quarter lies within the middle 34%. Applying the same procedure to the second method, we are able to generate two sets of “hot” and “cold” market conditions. After determining the three categories of market conditions (hot market, normal market, and cold market), the IPO initial returns are classified into nine subsamples based on the differences of prevailing market conditions in the periods of offer price approval and IPO listing; details are given in the next section. Regression Model In the final stage, using a multiple regression model, we examine whether IPO listing time lag has any significant effect on the level of underpricing appears on the listing day. It was suggested that listing time lag results in intended and unintended underpricing which constitute the observed total underpricing on the listing day and hence the IPO time lag (LAG) is considered as the main explanatory variable of the model to be tested, while the IPO market adjusted initial return (MAIR) is used as the dependent variable in one model and UIUP in another model. A number of other control variables are included in the test models as suggested in literature. The details of test models are given with results and variable specifications are in Appendix I. 5. Results and Discussion Initial Returns Results presented in Table 1 depict that IPO investors in Malaysia earn significantly higher initial return than that is earned by the investors in Singapore market. The MAIR in Malaysian market was 93.31 percent compared to 31.73 percent in Singapore, lending support to the first hypothesis. The large disparity of initial returns in two markets, with same origin, shows the different levels of efficiency in primary market. Evidence suggests that book building based offer pricing system requires lower underpricing in Singapore. Whereas, in Malaysia, underpricing is significantly higher, as market book building efforts are not very effective since the new issue offer price needs to obtain official approval from securities authority, who ensures distribution of corporate wealth in favor of native population under the New Economic Policy. Consequently, delay in IPO listing occurs after fixing the offer price. The average listing time lag for Malaysian IPOs is 115 days during the period of study, while it is only 19 days for Singapore IPOs. 63 Table 1: Panel A: International Research Journal of Finance and Economics - Issue 20 (2008) Market-Adjusted Initial Returns (MAIR) for Singaporean and Malaysian IPOs Yearly descriptive statistics of MAIRs in Singapore and Malaysia over the decade since the separation of two markets in 1990 Singapore Malaysia Std Dev 46.52 24.30 20.22 41.42 25.96 30.91 24.30 27.88 37.48 108.32 34.77 55.26 No. of IPOs 15 10 15 20 33 19 21 36 21 51 81 322 Mean 55.77 40.04 40.11 79.41 109.51 86.41 175.56 117.48 32.51 20.36 62.18 93.31 Med 44.46 31.25 27.30 63.77 99.06 82.12 160.02 100.48 29.45 20.65 58.37 70.96 Max 170.47 129.02 169.40 274.50 290.45 170.86 391.49 396.70 84.47 86.46 175.08 396.70 Min 9.86 -10.68 -5.67 -16.00 28.51 30.67 23.11 -6.06 -2.37 -26.06 -8.10 -26.06 Std Dev 37.23 31.22 41.10 50.03 52.98 37.32 91.66 97.73 24.14 33.06 37.36 79.64 No. of IPOs 31 38 44 44 66 51 92 88 28 19 38 539 Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Total Mean 40.26 35.77 10.88 70.00 20.14 25.84 18.78 29.63 24.49 63.37 16.42 31.73 Med 29.57 40.35 4.43 77.55 11.38 13.67 12.80 23.62 17.11 30.02 4.96 17.75 Max 183.55 62.64 73.24 130.98 88.10 115.59 84.06 100.36 124.85 633.44 130.71 633.44 Min -7.97 -12.17 -8.05 1.70 -8.36 -9.03 -12.46 -10.15 -20.50 -12.83 -28.97 -28.97 Panel B: Comparison of mean MAIR of Singaporean and Malaysian IPOs over the period 1990-2000 No of IPOs 322 539 MAIR 31.73 93.31 F-stat 149.47*** P-value 0.00 t-stat -13.36*** P-value 0.00 Markets MAIR (Singapore) MAIR (Malaysia) P-value is for one-tail test. The asterisks *** denotes the level of significance at one percent. The MAIR measures the market adjusted initial return earned by the IPO investors, and calculated as IRi - Rm, where, IRi is raw initial return of stock i calculated as (Pit – Pio)/Pio; where, Pit is the closing price on the first day of trading and Pio is offer price of stock i. Rm is market return for the period from the approval day of IPO price to the day of listing, which is calculated as (It – Io)/Io. Where, It is the closing price of the market index on issue i’s first trading day, Io is the closing price of the market index on the approval day of issue i’s offer price. The Singapore All-Sing Equities Price Index and the Kuala Lumpur Composite Index are used as the market benchmarks in Singapore and Malaysia respectively The large disparity of initial return in the two markets is observed through out the study period. MAIR is significantly higher in Malaysia than that in Singapore, except in 1999. The disparity appears to be extreme during the period from 1994 to 1997 when Malaysian market was booming with large number of IPOs listed. The level of initial return appeared in this study is generally consistent with the prior findings of other studies on these two markets. Price Earning Ratios Results presented in Table 2 depicts that, in both markets, the market PE ratio of industry remains stable over IPO approval and stock listing periods. In Singapore, the average market PE of industry was found to be 17.31 at IPO approval time and 17.19 at listing time, while those in Malaysia were 23.73 and 22.42 respectively in two periods. International Research Journal of Finance and Economics - Issue 20 (2008) Table 2: 64 Descriptive statistics of the PE ratios for Singaporean and Malaysian IPOs and listed companies at IPO approval and listing time. Singapore L PEi PE A ind 17.68 17.31 14.57 16.35 85.20 32.38 4.79 7.37 11.71 4.51 258 b 310e Malaysia L PEi PE A ind 14.74 23.76 13.06 23.39 66.36 49.72 3.45 7.98 8.15 5.78 533 c 661d Mean Med Max Min Std Dev N PEiA 14.57 11.50 74.10 1.50 10.57 263 a PE L ind 17.19 16.28 30.92 8.57 4.53 310 e PEiA 7.06 6.67 16.87 2.91 2.16 533 c PE L ind 22.42 22.48 53.68 6.40 6.46 661d Notes a 27 IPOs’ prospective PE ratios are not available, not applicable for use or removed as outliers. b The PE ratios of 32 issues are excluded as their forecasted EPS values are either negative or not available, and some PE ratios are removed as outliers. c Three issues are excluded since their forecasted EPS values are unavailable or negative. d The average industry PE ratios in the week prior to approval date and on IPO’s listing date are not available for the Infrastructure Project Companies (IPC) industry. None of the companies’ PE ratios exist during certain periods after adjustments for outliers. Thus, the average industry PE ratios cannot be computed. e a total of 12 companies are removed because they are not incorporated in Singapore. PEiA is the prospective PE ratio of issue i as stated on the prospectus. PEiL is the PE ratio of issue i on its listing date. ind PE A is the average of daily ind industry PE ratio in the week prior to the IPO’s approval date. One week is used to calculate the average industry PE ratio as it is more representative of the industry condition around the time when the offer price is fixed. PE L is the PE ratio of industry on the IPO’s date of listing. The important finding is that the PE of Singapore IPO stocks on the listing day was closer to market PE of industry, while that of Malaysian IPOs remains significantly lower than the market level on the listing day. This could indicate that the fair value of Singapore IPOs reveals after starting of market trade, while the value of Malaysian IPOs does not reveal properly even after market trading starts on the listing day. This lends support to earlier findings that Malaysian IPOs perform positively in the aftermarket period (Uddin and Wong, 2003). The existence of indented underpricing in both Singapore and Malaysia can primarily be traced from the prospective PE of IPOs on the approval time ( PEiA ), which is much lower than the listing day PE of IPO stocks ( PEiL ), average industry market PE A L on the approval time ( PEind ), and that on the IPO listing time ( PE ind ). The statistical significance of the variations of PE ratios is presented in Table 3. Table 3: Statistical Significance of the Variations of PE ratios for IPO companies and the Industry during the offer Approval and Listing Periods. Variables Average industry PE ratio in the week prior to prospectus date Prospective PE ratio of IPO PE ratio of IPO on listing date Prospective PE ratio of IPO Average industry PE ratio on IPO’s listing date PE ratio of IPO on listing date Average industry PE ratio in the week prior to approval date Prospective PE ratio of IPO PE ratio of IPO on listing date Prospective PE ratio of IPO Average industry PE ratio on IPO’s listing date PE ratio of IPO on listing date N 310 263 258 263 310 258 661 533 533 533 661 533 PE Difference t-stat P-value 17.31 2.74 3.89*** 0.00 14.57 17.68 3.11 3.17*** 0.00 14.57 17.19 -0.49 -0.62 0.53 17.68 23.76 16.7 62.34*** 0.00 7.06 14.74 7.68 21.02*** 0.00 7.06 22.42 7.68 17.06*** 0.00 14.74 Panel A: Singapore Panel B: Malaysia (a) (b) (c) (a) (b) (c) The asterisks *** denotes the level of significance at one percent. In Singapore, the average prospective PE of IPOs ( PEiA ) is lower than the average market PE A of industry on a week before issue approval day ( PEind ) with a significant difference of 2.74. The PEiA 65 International Research Journal of Finance and Economics - Issue 20 (2008) is also lower than the IPO PE ratio on the listing day ( PEiL ) with a significant difference of 3.11. On the listing day, the IPO PE is very much close to the average market PE of industry. The difference L between PE ind and PEiL is only -0.49, which is not significant. On the other hand in Malaysia, PEiA is A extremely lower than PEind . This suggests that IPOs are deeply underpriced in Malaysia compared to A that in Singapore. The difference between PEiA and PEind is 16.7 and significant with a t statistics of 62.34. Interesting finding is that, in Malaysia, the fair value of IPO does not fully revealed even after starting of market trade. Therefore, the listing day PE of IPO stocks ( PEiL ) is though appears to be significantly higher than the prospective PE of IPO ( PEiA ), the PEiL still remains much lower than the L average market PE of industry ( PEind ). The difference is 7.68 that is significant with a t statistics of 17.06. Intended and Unintended Underpricing Table 4 shows that average intended underpricing (IUP) in Singapore is 10.33 percent while that in Malaysia is 68.81 percent. The breakdown result depicts that average IUP in Malaysia is significantly higher that in Singapore for all industrial sectors, supporting our first hypothesis (H1) that more discount on offer price is required in Malaysia due to higher ex-ante uncertainty. In Malaysia, the IUP ranges from 39 percent (for Hotels and Restaurants) to 88.35 percent (for Construction sector); whereas in Singapore, it ranges from 4.9 percent (for Finance sector) to 17.12 percent (for Construction sector). The findings on IUP is consistent with the PE results presented earlier - the average prospective PE ratio of Malaysian IPOs is only 7.06 while that of Singapore IPOs is 14.57, suggesting that Singapore IPO prices are set at a higher level than that in Malaysia. Table 4: Intended Underpricing (IUP%) of IPOs in Singapore and Malaysia across the Industrial Sectors IUPSing 7.15 (n=92) 17.12 (n=28) 4.9 (n=25) 13.11 (n=80) 17.1 (n=9) 8.1 (n=18) 11.11 (n=12) 10.33 (N=264) IUPMalay 57.15 (n=181) 88.35 (n=54) 42.32 (N=37) 84.91 (n=184) 39.03 (n=3) 67.13 (n=25) 51.13 (n=45) 68.81 (N=529) IUPSing - IUPMalay -50.00 -71.23 -37.42 -71.8 -21.93 -59.03 -40.02 -58.48 t value -10.12*** -6.23*** -16.11*** -5.22*** -14.19*** -6.56*** -4.22*** -14.30*** Industry Commerce, Consumer Products Trade, and Services Construction Finance Manufacturing, and Industrial Hotels and Restaurants Properties Others Total Singapore exchange classifies the sectors as: 9i) Commerce (ii) Construction, (iii) Finance (iv) Manufacturing (v) Hotels and Restaurants, (vi) Properties (vii) Multi-industry. On the other hand, the Kuala Lumpur Stock Exchange classifies the industry as (i) Consumer Product (ii) Industrial Production, (iii) Trade and services (iv) Construction (v) Technology (vi) Finance (vii) Hotels, (viii) Properties, (ix) Plantations, (x) Mining and (xi) Infrastructure Project Companies. For the purpose comparing the IPOs in two markets we combine some sectors, e.g., Commerce in Singapore and Trade & Service in Malaysia are kept in one category, and Manufacturing in Singapore and Industrial Product in Malaysia are considered similar. If no similarity of industrial classifications in the two markets, them we kept them as other category. The asterisks *** denotes the level of significance at one percent. It has been conjectured that unintended underpricing (UIUP) occurs on the listing day because of delayed listing of IPO after setting the offer price. Hence, the intended underpricing considered at the time of IPO approval may be significantly different from the actual underpricing observed through investors’ initial return. Results presented in Table 5 depicts that UIUP occurs both in Singapore and Malaysia. The average UIUP in Malaysia is 25.81 percent, but that in Singapore is 18.40 percent. The International Research Journal of Finance and Economics - Issue 20 (2008) 66 difference is statistically significant. As expected, UIUP is consistently higher in Malaysia than that in Singapore for all the industrial sectors except Hotel and Restaurant. The results in Table 5 confirm our second hypothesis (H2) that the average UIUP is higher Malaysia than that in Singapore. However, it is noted that UIUP difference between Singapore and Malaysia is statistically significant, but the level of difference is not big like the difference in IUP presented earlier. Table 5: Unintended Underpricing (UIUP%) of IPOs in Singapore and Malaysia across the Industrial Sectors UIUPSing 24.27 (n=92) 12.52 (n=28) 11.81 (n=25) 14.11 (n=80) 22.21 (n=9) 22.10 (n=18) 21.11 (n=12) 18.40 (N=264) UIUPMalay 29.68 (n=181) 28.07 (n=54) 30.34 (N=37) 20.23 (n=184) 15.56 (n=3) 26.10 (n=25) 27.09 (n=45) 25.81 (N=529) UIUPSing- UIUPMalay -5.41 -15.55 -18.53 -6.12 6.65 -4.00 -5.98 -7.41 t value -1.98** -2.13** -1.89* -1.82* 0.13 -1.15 -1.72* -1.70* Industry Commerce, Consumer Products Trade, and Services Construction Finance Manufacturing, and Industrial Hotels and Restaurants Properties Others Total Singapore exchange classifies the sectors as: 9i) Commerce (ii) Construction, (iii) Finance (iv) Manufacturing (v) Hotels and Restaurants, (vi) Properties (vii) Multi-industry. On the other hand, the Kuala Lumpur Stock Exchange classifies the industry as (i) Consumer Product (ii) Industrial Production, (iii) Trade and services (iv) Construction (v) Technology (vi) Finance (vii) Hotels, (viii) Properties, (ix) Plantations, (x) Mining and (xi) Infrastructure Project Companies. For the purpose comparing the IPOs in two markets we combine some sectors, e.g., Commerce in Singapore and Trade & Service in Malaysia are kept in one category, and Manufacturing in Singapore and Industrial Product in Malaysia are considered similar. If no similarity of industrial classifications in the two markets, them we kept them as other category. The asterisks ***, **, * denote the level of significance respectively at one percent, 5 percent and 10 percent. Hot-Cold market effect Results presented in Table 6 reveal that changes in market conditions during the period of listing time lag affects MAIR. The market conditions are classified as ‘hot (H)’, ‘normal (N)’ and ‘cold (C)’ using two methods. The method 1 is based on number of IPO floatation in every quarter and the method 2 is based on the quarterly average market return. It reveals in Panel A of Table 6 that IPOs whose price are approved in hot period but listed in hot period (HH subsample) has significantly higher MAIR than that of the IPOs whose price are fixed in hot period but market becomes cold when they are listed (HC subsample). It is found that IPOs whose price are fixed in normal period but listed in hot period (NH subsample) has MAIR of 96.89 percent and 119.48 percent respectively using method 1 and method 2, while the IPOs whose price are fixed in normal period but listed in cold period (NC subsample) has MAIR of 68.78 percent and 43.72 percent respectively using two methods. Similarly, IPOs whose price are fixed in cold period but listed hot period (CH subsample) has MAIR of 56.17 percent and 59.78 percent respectively using two methods, while MAIR of CC subsample of IPOs (whose price are fixed in cold period and also listed in cold period) are only 37.23 percent and 45.15 percent respectively using the two methods. Generally, findings in Panel A show the effect of changes in market conditions on the level of underpricing observed after IPO listing. 67 Table 6: International Research Journal of Finance and Economics - Issue 20 (2008) Effect of Changing Market Conditions on Market Adjusted Initial Returns (MAIR %) during Listing Time Lag Period using different Subsamples. MAIR% across the different groups of IPOs classified according to different market periods Method 1 No. of IPOs 21 60 333 32 130 88 90 39 59 MAIR 16.08 71.13 77.99 68.78 65.97 96.89 37.23 41.49 56.17 No. of IPOs 75 52 125 51 170 101 199 42 46 Method 2 MAIR 27.94 118.76 74.25 43.72 52.98 119.48 45.15 40.13 59.78 Panel A: Subsample denotation HC HN HH NC NN NH CC CN CH Panel B: Significance of differences in MAIR% during Hot and Cold period listing with subsamples denoted above Method 1 Difference in MAIR 61.91 28.11 18.94 Method 2 Difference in MAIR 46.31 75.76 14.63 Comparing Subsamples HH-HC NH-NC CH-CC t-value 5.96*** 2.38** 2.67** t-value 3.33*** 8.98*** 1.77* For sub-sample denotations, we denoted the first letter as approval period and the second letter as listing period. For example, HH = Hot-Hot, where IPOs approved in hot period and also listed in hot period. HN = Hot-Normal, where IPOs approved in hot period but listed in normal period. HC = Hot-Cold, where IPOs approved in hot period but listed in cold period. Accordingly, other IPO sub-samples are constructed as NH = Normal-Hot, NN = NormalNormal, NC = Normal-Cold, CH = Cold-Hot, CN= Cold-Normal, and CC = Cold-Cold with similar meaning. Method 1 classifies the IPO market as hot normal or cold based on the number of IPOs issued quarterly, and the Method 2 is based on the average quarterly market return. The asterisks ***, **, * denote the level of significance respectively at one percent, 5 percent and 10 percent. The statistical significance of the difference in MAIR due to changes in the market conditions between IPO price fixing and listing periods are presented in the Panel B of Table 6. The differences of MAIR for HH and HC subsample are 61.91 and 46.32 percents respectively using method 1 and method 2, and those for NH and NC subsample are 28.11 and 75.76 percent using the two methods respectively. Similarly, the differences of MAIR for CH and CC subsample are 18.94 and 14.63 percents respectively using the two methods. All these differences in MAIR are statistically significant at one percent level, lending supports to our hypothesis three (H3). Regression results As conjectured, it is found that IPO initial return contains an unintended component. We therefore examine, using multiple regression models, whether the delay in IPO listing after fixing its offer price has significant effect on the initial return and its unintended component. Two sets of regression models are tested using combined and separate samples of Singapore and Malaysian IPOs. One set of regressions used MAIR as the dependent variable and the other set used UIUP as the dependent variable. The time lag between the approval of offer price and IPO listing (LAG) is considered as the main explanatory variable for the purpose of this study. In addition, a number selected explanatory variable are also included in the test models based on the established literature, conjecture of current study and data availability. In addition to listing time lag (LAG), we include gross issue proceeds, Ln(GIP), age of the IPO firm (AGE), fraction of outstanding shares retained by the existing directors (FR), intended underpricing (IUP), hot market period (HOT), cold market period (COLD), underwriters’ reputation (UR), industry classification (IND), section of the stock exchange where IPO is listed (LB), country of company incorporation (COUNTRY). The details on variable construction are available in Appendix I. The regression results using MAIR as dependent variable are presented in Table 7, while results using UIUP as dependent variable are shown in Table 8. International Research Journal of Finance and Economics - Issue 20 (2008) 68 The findings on combined sample presented in Panel A of Table 7 shows that the listing time lag (LAG) significantly affects the initial return of IPOs (MAIR), supporting the fourth hypothesis (H4). However, it is interesting to observe that the relationship between the initial return and listing time lag is quadratic instead of linear. This possibly reflects the fact that longer listing time lag results in higher ex-ante uncertainty requiring additional discount, but the issuers and underwriters cannot ascertain the right amount of discount required as it is difficult to forecast actual time needed before the listing of IPO after fulfilling all the requirements. Also, it is not easy to predict the future market conditions when IPO will be listed. If stock listing delayed longer than usual period after announcement of IPO approval, then resulting uncertainty might have negative impact on the demand for offered shares and hence the initial return becomes lower. Therefore, the initial return revealed on the day of listing and/or first trading deviates significantly from the underpricing discount intended earlier at the time of fixing the offer price. The results in Panel B and C show that LAG variable is not significant in Singapore but highly significant in Malaysia, suggesting that a significant period of delay in stock listing after announcement of IPO approval could affect the initial return. This is because the average listing time lag in Singapore is only 19 days but that in Malaysia is about 115 days. 69 Table 7: International Research Journal of Finance and Economics - Issue 20 (2008) Regression Results using Market Adjusted Initial Return (MAIR) as the Dependent Variable Regression Coefficients (t-statistics) Panel B: Singapore Panel C: Malaysian Sample Sample 0.128 -3.269 (1.853*) (-4.661***) 0.008 0.010 (1.146) (3.292***) -0.0002 -0.0003 (-0.879) (-2.828***) -0.093 0.019 (-3.420***) (0.637) 0.019 0.0010 (0.843) (0.400) 0.090 1.418 (1.739*) (5.728***) 0.038 0.027 (1.465) (9.054***) 0.276 0.267 (5.441***) (3.825***) -0.085 -0.1175 (-1.263) (-0.169*) 0.001 (0.154) 0.156 (2.267**) -0.106 (-1.122) Explanatory Variables Constant LAG (LAG)2 Ln (GIP) AGE FR IUP HOT COLD UR IND LB COUNTRY Adjusted R2 F-statistic Prob (F-statistic) N Panel A: Combined Sample 0.765 (1.655*) 0.012 (3.438***) -0.004 (-2.12**) -0.0923 (-4.363***) -0.004 (-0.210) 0.940 (4.172***) 0.017 (4.022***) 0.257 (4.498***) -0.089 (-1.463) -0.609 (-2.043**) 0.315 39.090 0.0000 775 0.1107 2.6470 0.0032 246 0.3095 19.2736 0.0000 529 Numbers in parentheses are the t statistics of regression coefficients. The asterisks ***, **, * denote the level of significance respectively at one percent, 5 percent and 10 percent. LAG denotes the time lag between the approval of offer price and the listing of IPO. Ln (GIP) is the log of gross issue proceeds of the IPO measuring the amount of capital raised from market. AGE is the years since incorporation of the company. FR denotes the fraction of total outstanding shares (after IPO) retained by the directors. IUP is the intended underpricing (for details, see equation 6 and 7 in Methodology section). HOT and COLD denote market condition when IPO is listed (for details, see the Methodology section). UR is the measure of underwriter's reputation. IND is the classification of industry under which category IPO is listed. We classify the industry as risky and less risky categories, and IND denotes risky industry. LB identifies the section of market (main board or second board) where the IPO is listed, and LB to denote the listing second board. COUNTRY denotes whether IPO is listed on Singapore market or not. The details about the construction of explanatory variables are provided in the Appendix 1 Panel A of Table 7 also depicts that, in addition to LAG variable, Ln(GIP), FR, IUP, HOT and COUNTRY variables are statistically significant and contain the expected sign of coefficient. The coefficients of Ln(GIP) and FR are consistent with the information asymmetry theories of IPO underpricing. The significant coefficient of IUP suggests that a part of the investors’ initial return is resulted because of intended price discount offered by the issuers and underwriters. The significant HOT variable depicts that initial return is higher if IPO lists in hot market period and the negative coefficient of COUNTRY variable confirms that average IPO initial return is significantly lower in Singapore compared to that in Malaysia. The results for separate samples presented in Panel B and C are largely similar to those for combined sample in Panel A, except for Ln(GIP) that is not significant in Malaysia. The results in Table 8 show that IPO listing time lag (LAG) significantly affects the level of unintended underpricing (UIUP), although the relationship between UIUP and LAG is quadratic instead of linear. This supports our earlier analysis that if stock listing delayed longer than usual period after announcement of IPO approval, then resulting uncertainty might have negative impact on the International Research Journal of Finance and Economics - Issue 20 (2008) 70 demand for offered shares and hence the initial return becomes lower. Therefore, given the level of IUP, the unintended underpricing (UIUP) becomes lower. However, the results on separated sample as presented in Panel B and C depict that the relationship between UIUP and LAG is quadratic in Malaysia but linear in Singapore. The results on combined samples show that, AGE, IUP, HOT, COLD and COUNTRY variables also significantly affect UIUP. Table 8: Regression Results using Unintended Underpricing (UIUP) as the Dependent Variable Regression Coefficients (t-statistics) Panel B: Singapore Panel C: Malaysian Sample Sample 0.023 0.061 (2.123**) (2.231**) 0.003 0.018 (1.699*) (7.232***) -0.0002 -0.002 (-0.879) (-1.828*) -0.035 0.019 (-2.320**) (0.637) -0.013 -0.012 (-0.654) (-2.100**) -0.050 0.321 (-1.789*) (0.128) -0.100 -0.033 (-2.234**) (-2.211**) 0.174 0.213 (2.234**) (4.425***) -0.047 -0.134 (-1.459) (-2.122**) -0.091 (-0.154) 0.023 (0.254) -0.09 (-1.672*) Explanatory Variables Constant LAG (LAG)2 Ln (GIP) AGE FR IUP HOT COLD UR IND LB COUNTRY Adjusted R2 F-statistic Prob (F-statistic) N Panel A: Combined Sample -0.151 (-1.755*) 0.020 (4.111***) -0.003 (-1.77*) -0.0231 (-1.363) -0.011 (-2.210**) 0.940 (1.210) -0.072 (-2.022**) 0.152 (6.228***) -0.055 (-1.872*) -0.091 (-2.122**) 0.2916 34.980 0.000 775 0.4000 26.123 0.000 246 0.2325 13.0226 0.000 529 Numbers in parentheses are the t statistics of regression coefficients. The asterisks ***, **, * denote the level of significance respectively at one percent, 5 percent and 10 percent. LAG denotes the time lag between the approval of offer price and the listing of IPO. Ln (GIP) is the log of gross issue proceeds of the IPO measuring the amount of capital raised from market. AGE is the years since incorporation of the company. FR denotes the fraction of total outstanding shares (after IPO) retained by the directors. IUP is the intended underpricing (for details, see equation 6 and 7 in Methodology section). HOT and COLD denote market condition when IPO is listed (for details, see the Methodology section). UR is the measure of underwriter's reputation. IND is the classification of industry under which category IPO is listed. We classify the industry as risky and less risky categories, and IND denotes risky industry. LB identifies the section of market (main board or second board) where the IPO is listed, and LB to denote the listing second board. COUNTRY denotes whether IPO is listed on Singapore market or not. The details about the construction of explanatory variables are provided in the Appendix 1 The findings are broadly similar for separate samples, except AGE and COLD variable that are not significant in Singapore. Among the significant variables, the coefficient of AGE is negative, suggesting that older firms have less uncertainty and appropriate discount can be estimated more precisely, hence less unintended underpricing occurs. The negative co-efficient of IUP suggests that less unintended unperpricing occurs when intended underpricing is more. This is appropriate because if the issue value can be ascertained earlier correctly then the initial return on the day of listing will deviate insignificantly from the underpricing intended at the time of fixing the offer price. The positive coefficient of HOT variable and negative coefficient of COLD variable depict the impact of market 71 International Research Journal of Finance and Economics - Issue 20 (2008) conditions on the degree of unintended underpricing. The negative coefficient of COUNTRY variable confirms that unintended underpricing is less in Singapore. This is appropriate because IPO listing does not delay much longer like that happens in Malaysia. Hence, it may be possible to forecast the issue value for Singapore IPOs more accurately at the time of fixing the offer price. 6. Conclusion We examine whether the total amount of IPO initial return earned by the investors can be considered as the underpricing intended by the issuers and underwriters. This question is relevant in the countries where IPO price is fixed usually long time before the listing of stocks on the exchange, e.g. Malaysia and China. The issuers and underwriters need to give more discounts on offer price if IPO listing delays longer after finalizing the offer price, as ex-ante uncertainty increases, but determining a right amount of discount becomes difficult because the market condition might be changed during listing time lag period. Moreover, the value of IPO may become clearer during listing time lag via information dissemination from different sources e.g., analytical market reports, press reports, industry reports, and securities analyst reports. Since the approved offer price cannot be adjusted with the changed market conditions and additional information revealed in listing time lag, the level of underpricing intended by the issuers and underwriters while fixing offer price may significantly deviate from the initial return of investors upon IPO listing. Therefore, a part of initial return can be considered as unintended underpricing. We examine the existence of intended and unintended underpricing in Singapore and Malaysia, because both markets started as a single entity and separated later in 1990. Since their separation, the Singapore exchange has been following a market based offer pricing system that is based on book building by the underwriters, and delay in stock listing usually not occurs after setting the offer price. Whereas in Malaysia, the securities authority requires the issuers and underwriters to obtain approval of proposed offer price long time before the listing of IPO on the exchange, as they are to ensure implementation of the New Economic Policy. The empirical findings based on 322 Singapore IPOs and 539 Malaysian IPOs, over a long period of 11 years after separation of the two markets, depict that investors in Malaysia earn significantly higher initial return than that is earned by the investors in Singapore. The market adjusted initial return in Malaysia is 93.31 percent compared to 31.73 percent in Singapore. In Malaysia, the average PE ratio of IPO stocks on the listing day remains significantly lower than the average market PE ratio of industry. In Singapore, however, both the ratios become closer on the day of stock listing suggesting that the Singapore market is more efficient than the Malaysian counterpart. Evidence also shows that, while fixing the offer price, the prospective PE ratio of IPO is kept significantly lower than the market PE of industry that prevails around the period. This phenomenon is found in both countries, but sever in Malaysia. Hence, average intended underpricing (IUP) in Singapore is much lower (10.33 percent) than that in Malaysia (68.81 percent). Since delay in listing occurs after fixing the offer price, unintended underpricing (UIUP) results in both countries but the level of UIUP is significantly higher in Malaysia – about 25.81 percent compared to 18.40 percent in Singapore. The existence of UIUP, therefore, suggests that a part of the total initial return earned by the investors is not intended by the issuers and underwriters when offer price is fixed. Regression results confirm that the listing time lag after setting the offer price requires more underpricing discount, as ex-ante uncertainty increases, but the difficulties in determining an appropriate amount of discount generates unintended underpricing upon listing of IPO. Therefore, we conclude that primary market is inefficient if unintended underpricing occurs after IPO listing, hence issuers cannot get fair price of their public offer of shares. 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Uddin, 2001 and Chan et. al., 2004 Beatty and Ritter (1986), Clarkson and Merkley (1994), McGuiness (1992), Lee et al. (1996a and 1996b), Lee et al. (1996a and 1996b), Grinblatt and Hwang (1989), and Lam (1991), Proposed in this study Ibbotson and Jaffe (1975) and Ritter (1984) Ibbotson and Jaffe (1975) and Ritter (1984) Beatty and Ritter (1986), Carter and Manaster (1990), Kim et al (1993), McGuinness (1992) LAG Time lag between IPO price approval and listing time Continuous Ln (GIP) AGE FR IUP HOT Gross issue proceeds calculated as number of shares in the offer times the offer price. Period in years since incorporation of the firm. Fraction of outstanding shares (after IPO) retained by the existing owners Intended underpricing calculation as described in the paper. See the Methodology section for details IPO listed in Hot issue periods. See the Methodology section for details IPO listed in Cold issue periods. See the Methodology section for details Official underwriter ranking determined by the central bank. The central bank of Malaysia officially classify the merchant banks into two tiers (Tier I and Tier II) based on several requirements, such as capital, profit, management quality, and expertise. Tier-I merchant banks are the reputable ones. This variable is not used for Singapore samples Industry classification of IPO as 'risky'. All sectors are classified as risky and less risky based on the average market beta of the sector. Listing board classification: Main board and 2nd Board (for Malaysian IPOs) Singapore Continuous Continuous Continuous Continuous Dichotomous. 1, if listed in hot period Dichotomous. 1, if listed in cold period Dichotomous 1, if underwriter belong to Tier-II Dichotomous, 1, if IPO belongs to risky (beta>1) sector Dichotomous, 1, if listed in 2nd Board Dichotomous, 1, if Singapore IPO COLD UR IND Clarkson and Merkey (1994) LB COUNTRY