Pricing system and the initial public offerings market: A case of Singapore

Abstract

The initial public offerings (IPOs) market in Singapore offers a unique showcase for the price discovery process of risky securities. IPOs have traditionally been offered in the primary market under the fixed price system. In July, 1991, the SES introduced an option to issuers for IPOs to be offered on a two-tier pricing system. This allows issuers to incorporate a tender tranche in the public offer. Our findings confirm the intuition that fixed pricing and tender pricing respectively induces the dominant participation of retail and institutional investors. This regulatory and institutional framework allows for the refutable implications of the information asymmetry and estimation risk hypotheses to be tested directly. Initial price performance of IPOs under the two-tier pricing system offers prima facie evidence that is consistent with the information asymmetry hypothesis. However, further analyses suggest the pricing of estimation risk in the IPO market and explains why the two-tier pricing system suffers a cutback.