Issue manager reputation, underpricing and long-run performance of initial public offerings: Evidence from the Singapore IPO market

Abstract

The study explores the role of issue managers in the initial public offering (IPO) process. Empirical research shows that IPOs are associated with two significant market anomalies: short-run underpricing puzzle and long-run underperformance phenomenon. This paper examines the reputational influence of issue managers on the two anomalies. Employing the newly developed twelve-month rolling reputation ranking approach, our study is the first to furnish a comprehensive ranking of all the issue managers with a substantial presence in Singapore. Based on a sample of 384 IPOs listed on the Singapore Exchange between January 1, 1997 and August 22, 2008, we find evidence of prevalent short-run underpricing and long-run underperformance in the domestic market. Our findings indicate that the IPOs backed by higher reputation issue managers are associated with greater short-run underpricing. This is consistent with the market power hypothesis which postulates that higher reputation issue managers are able to generate greater market participation and higher market valuations in the immediate post-issue market. However, the reputational influence of issue managers diminishes with time. Beyond the twelve-month return window, the issue manager reputation no longer has predictive power for the returns performance. Overall, the results suggest that the consideration of issue manager reputation profile is important if proper inferences on the IPO returns performance are to be drawn.