THE INITIAL RETURN PERFORMANCE OF S-REIT IPOS

Abstract

The underpricing of Initial Public Offerings (IPOs) is one of the most puzzling issues in finance literature. Theoretically, the IPO price should be set to reflect the underlying asset valuation of the company. However, international evidence of Real Estate Investment Trust (REIT) IPOs underpricing reveals a financial anomaly. Research on Singapore REITs (S-REITs) focuses primarily on the risks and their long-term yields. Little attention was paid to the initial returns of S-REIT IPOs. In light of this gap, this paper aims to shed light on the initial price performance of S-REIT IPOs using First Day Returns and CAPM. This paper further explores differences in S-REIT IPOs initial returns in the hot market with high volume of IPO issues and the depressed market during the GFC period. Moreover, this paper identifies and examines the factors that contributing to the observed initial price performance using univariate analyses and Ordinary Least Squares (OLS). In this paper, the IPO underpricing phenomenon of US and Australian REIT IPOs is also observed in S-REIT IPOs. The mean First Day Return is 7.51%. Within the sample, 57.9% IPOs exhibit positive first day returns. In the longitudinal analysis, S-REIT IPOs are found to be greater underpriced in the hot market periods and less underpriced during the GFC period. The application of time-series CAPM regressions highlights that S-REIT IPOs are underpricing in the short-term. The results from univariate analyses and OLS regression reveal that underwriters’ influence and the signaling theory are reasonable explanations for the underpricing.