An Empirical Investigation of the IPO Underpricing Phenomenon: Evidence from the Singapore IPO Market.

Abstract

This paper examines the relative importance of the winner's curse hypothesis, underwriter reputation hypothesis, and ex ante uncertainty hypothesis in explaining the underpricing of initial public offerings (IPOs). A sample of 108 IPOs listed on the Singapore Exchange from 2010 to 2017 indicates that Rock's (1986) winner's curse hypothesis is the most relevant in explaining the underpricing phenomenon. By using proxy variables such as the oversubscription rate of informed investors and the proportion of shares allotted to uninformed investors, this paper finds that a higher demand by informed investors, which consequently crowds out uninformed investors in that they receive a smaller allocation of underpriced shares, is significantly associated with a higher level of underpricing. Singapore IPOs have been selected because this is one of the few markets where the balloting results of every IPO is publicly disclosed, which allows for the demand schedule and crowding out effect to be reconstructed.