The effects of offering method and trading location on the pricing of IPOs in Singapore

Abstract

In this study, we look at the effects of using different offering methods and examine whether the auction system is a better way of rationing IPOs in the sense of reducing the degree of underpricing. Preliminary findings show that IPOs offered via the auction system appear to have lower underpricing. However this is not confirmed by cross-sectional regression analysis. Results show that only the subscription rate is significantly associated with the degree of underpricing. The other variables such as the market of listing, the price earnings ratio at time of issue and the first day relative volume are not significantly related to the underpricing. The second part of the study compares fixed price initial public offerings (IPOs) listed on the Stock Exchange of Singapore Dealing and Automated Quotation System (SESDAQ), the second tier stock market in Singapore, with fixed price IPOs listed on the Main Board. The PE ratios at time of issue and subscription rates of SESDAQ IPOs are significantly lower than Main Board IPOs. Their initial market-adjusted returns are also lower but not significantly so. In the post-listing period, a different picture is seen. SESDAQ issues have significantly higher returns than Main Board IPOs.