CHAPTER 1 INTRODUCTION
5.2 Impact of Level of Underpricing on Long-run Performance .1 Descriptive Statistics
5.2.2 Regression Analysis
Table 25 presents the regression analysis results for the long-run performance of IPO stocks in Singapore Exchange and Bursa Malaysia. At a 5% level of significance, for the period of 2007-2016, the resulting ( = 0.0003) indicates that underpricing has a positive and significant impact on long-run performance on Year 3 CAR of Singapore Exchange.
SGX Year 1 CAR
KLSE Year 1 CAR
SGX Year 3 CAR
KLSE Year 3 CAR
Mean 1.67% 1.67% 2.65% 1.76%
Standard Error 0.016169793 0.010828081 0.010120187 0.006293405
Median 0.49% 1.26% 1.51% 1.71%
Mode #N/A #N/A #N/A #N/A
Standard
Deviation 0.051133375 0.0342414 0.032002841 0.019901494
Sample
Variance 0.002614622 0.001172473 0.001024182 0.000396069
Maximum 12.81% 11.53% 7.97% 5.10%
Minimum -3.08% -0.29% -1.29% -1.21%
Table 25.
Although most of the results presented are insignificant, there is a mixture of positive and negative relationships between the two variables. It is presented as negative for Year 1 CAR of Singapore Exchange (2007-2011), Year 1 CAR of Bursa Malaysia (2007-2016, 2007-2011, 2012-2016), and Year 3 CAR of Bursa Malaysia (2007-2016, 2007-2011). Meanwhile, it is presented as positive for Year 1 CAR of Singapore Exchange (2007-2016, 2012-2016), Year 3 CAR of Singapore Exchange (2007-2016, 2007-2011, 2012-2016), and Year 3 CAR of Bursa Malaysia (2012-2016). With that, the proposed 020is accepted since the level of underpricing has no significant effect on the long-run performance of IPOs in Bursa Malaysia.
As the results indicate a positive and significant impact on long-run performance on Year 3 CAR of Singapore Exchange, the proposed 010is therefore rejected. Additionally, the results oppose the a priori expectations established in this research as the study of AlShiab (2018) found that in the region of MENA for the period of 2001-2015, underpricing has a significant and negative effect on the long-run performance of the IPO stock. Consequently, the findings are not in line with the underperformance anomaly and which originated from Ritter (1991) and the fads
Period
Singapore Malaysia
Year 1 CAR Year 3 CAR Year 1 CAR Year 3 CAR
Coefficient of Underpricing
P- value
Coefficient of Underpricing
P- value
Coefficient of Underpricing
P- value
Coefficient of Underpricing
P- value
2007-2016 0.00788398 0.4832 0.0178548 0.0003** −0.0243866 0.2133 −0.000527290 0.6579 2007 - 2011 −0.0430710 0.5084 0.0223713 0.2469 −0.0380888 0.3642 -0.0140785 0.5312 2012 - 2016 0.0205630 0.3056 0.00322071 0.8742 −0.00403527 0.3603 0.00801635 0.5538
hypothesis, wherein the findings show that a negative relationship exists among the variables wherein underpriced offerings underperform in the long run. The findings of the study are supported by Krigman et al. (1999) which found that there is a positive relationship between the two variables, long-run performance and underpricing. It found that underpriced IPOs continue to do well in the future. On the contrary, those “extra hot” IPOs are an exception, for these provide the worst long-run performance (Krigman et al., 1999). It is also considered that underpricing may be intentionally done by the auditor, issuing firm, and the underwriter.
Therefore, the more underpriced a firm is, the better the long-term aftermarket performance will be as exemplified by the findings in the case of SGX IPOs in its third year.
A regression model for the Year 3 CAR of Singapore Exchange was drawn from the statistical results:
= -0.00206419 + 0.0178548 (Underpricing) 3
ˆ
(11)
The model passed the Breusch-Pagan test for heteroskedasticity and the normality test (See Appendix K). More than this, the resulting adjusted r-squared of 80.73% (see Table 26) stipulates that 80.73% of long-run performance variation can be explained by the independent variable of the model. The coefficient indicates that for every one (1) unit increase in underpricing there is an increase of 0.0178548 in its year 3 long-run performance (See Table 27). Therefore, underpricing significantly affects the IPO’s long-run performance wherein the more underpriced an offering is, the better is its performance in the long-run.
Table 26.
Table 27.
Note: ** significant at 0.05 level of significance
R-squared Adjusted R-squared
F (1,8) P-value (F)
0.828667 0.807251 38.69274 0.000254
Coefficient Std. Error t-ratio p-value
const −0.00206419 0.00639388 −0.3228 0.7551
MAAR 0.0178548 0.00287038 6.220 0.0003 **
CHAPTER 6
CONCLUSION AND RECOMMENDATIONS 6.1 Conclusion
This research aimed to examine the level of underpricing and the long-run performance of IPO stocks listed in Singapore Exchange (SGX) and Bursa Malaysia (KLSE) from 2007-2016.
First, the researchers wanted to determine if the phenomenon of IPO underpricing is evident in SGX and KLSE as measured by the market-adjusted abnormal return (MAAR). The researchers rejected 01and 011 as IPO underpricing exists in both stock exchanges. Using descriptive statistics, underpricing is observed to be significantly higher in SGX (194.26%) than in KLSE (14.91%). In SGX, underpricing was higher during the period of 2007-2011 (305.39%) than in 2012-2016 (21.39%). Meanwhile, the level of underpricing in KLSE seemed much closer across the two time periods at 6.4% and 21.43%, respectively.
Second, the researchers aim to identify the determinants of underpricing that are evident in both stock exchanges for 2007-2016. Possible determinants include ownership structure, firm size, firm age, offering price, offering size, financial leverage, return on equity, and firm industry.
However, the regression analysis documents that for SGX, firm industry, specifically those in consumer discretionary, is the only significant predictor of underpricing. The regression model can explain 7.7% of the variations in the level of underpricing. On the other hand, only firm age has a positive and significant effect when it comes to KLSE. Additionally, the model only accounts for 9.47% of the underpricing variations.
Therefore, only 09 and 014 are rejected. The influence of these variables on the level of underpricing can be supported by the Information Asymmetry Theory and the Signaling Theory. Information Asymmetry Theory, especially when it comes to explaining the presence of uninformed investors in the market, can account for firms being motivated to underprice their
IPO offerings. Meanwhile, the Signaling Theory can indicate that firms can choose to underprice their IPOs as a form of strategy to pursue growth.
A comparison between the time periods was also conducted upon taking into consideration possible changes in the trading economic conditions during the periods 2007-2011 and 2012-2016. Table 23 points out that the significant variables vary depending on the time periods. Offering size and firm industry have negative significant effects on the level of underpricing in SGX for 2007-2011. In terms of firm industry, firms that belong to Consumer Discretionary and Real Estate are observed to have a higher level of underpricing. Meanwhile, for KLSE, firm age is the only significant variable for IPO underpricing. For 2012-2016, offering price negatively affects underpricing while those in the Consumer Staples industry are more underpriced in SGX. On the other hand, only firm size impacts the level of underpricing in KLSE in a positive way.
In terms of long-run performance, the researchers wanted to establish whether the level of underpricing affects the long-run performance of IPOs in SGX and KLSE. This is measured by the average first-year cumulative abnormal returns (CAR) and third-year CAR for 2007-2016 and the separate periods, 2007-2011 and 2012-2016. The researchers rejected 010 as the results indicate a significant impact on long-run performance on Year 3 CAR of Singapore Exchange for the period of 2007-2016. Therefore, when an IPO is initially underpriced, it is expected that it will not underperform relative to its benchmark portfolio in the long-run in Singapore Exchange, but not in Bursa Malaysia.