| Summary: | In recent months. Initial Public Offers (IPOs) in Singapore have proven to be an
almost guaranteed source of capital profit because most new issues have been
oversubscribed and investors in these unseasoned stocks have reaped substantial
gains. This project seeks to examine two aspects of IPOs. First. the underpricing
phenomenon of IPOs will be observed through a stock-valuation model on an exante
basis as opposed to an ex-post basis. This is achieved by comparing the forecast
price of the new stock (obtained through the model) against the issue price .
Second, the accuracy of this model in predicting the price of the stock on actual
listing will be examined. The chapter on literature review examines three broad
areas of literature relating to this project. The first section deals with institutional
arrangements and the stock exchange listing requirements. The second section
examines the many theories underlying the underpricing phenomenon of IPOs. The
third looks at the types of models which are being used by stock analysts to value
common stocks. The stock-valuation model used in this project was determined as
follows: Cross-sectional regression analysis was used to determine the weights the
market places on a set of hypothesized determinants of common stock prices. Once
the weights for the determinants were obtained, the relevant financial characteristics
of the firms seeking initial listing (i.e ., the IPOs) were then plugged into this
equation to obtain a forecast price for the unseasoned issue. These forecast prices, which represent the markets valuation of stock. were then compared with the issue
prices and actual listing prices to establish underpricing and the accuracy of the stock
v aluation model respectively . The analysis of results re v ealed two interesting - -
observations . First, all the forecast prices (P1) obtained from the model were higher
than the issue prices (P;) given in the prospectus. This clearly indicates the
existence of underpricing of these IPOs. Second, most of the forecast prices (P1
)
were also higher than the actual closing prices (PJ on the first day of listing. This
can be rationalized as follows : Since the model uses characteristics from seasoned
stocks to price the IPOs. this could explain why the forecast price based on the
model is generally higher than the actual listing price of the IPOs (which are riskier
than seasoned stocks) . Alternatively , we know that the financial characteristics of
companies seeking listing were taken from the IPO prospectus. The figures within
are based on projected figures given by management. Potential investors and stock
analysts who represent the market might discount these forecasted figures, whereas
the stock valuation model used in this project does not. This may thus result in
lower actual prices on the first day of listing as compared to the forecast price
predicted by the stock valuation model.
|
|---|