Initial public offerings in Singapore

This study has documented 2 aspects of IPO - its underpricing phenomenon and longrun performance. It has been a well-known fact that investors are able to reap substantial profits due to capital appreciation if they are successful in their subscription for new issues. Throughout the 10 years spanning from 1983 to 1993, we have seen 88 IPOs - 55 from the Mainboard and 33 from SESDAQ. Almost all the new issues were heavily subscribed, such as L&M Group Investments which was oversubscribed by a staggering 248 times when it went public in December 1983 . The share produced an impressive 190 per cent premium after its first trading day in the stock market. We have shown in our study that it is such so-called "guaranteed immediate profit" that drives the investors to subscribe heavily to any IPO. They perceive that all IPOs are underpriced, that is, they periodically over-estimate the growth opportunities of IPOs. Market sentiment plays a significant role in creating this systematic over-estimation. 'Bull issues' perform consistently and significantly better than bear issues. Also, IPOs with smaller issue sizes produce higher premiums, probably due to the likelihood that demand easily exceeds supply as a result of fewer shares available. Our study shows that there is substantial a difference in the long-run performance for IPOs listed in the Mainboard and SESDAQ. We have been keeping track of the month end closing price of each IPO for a period of 24 months. Our empirical findings indicated that the IPOs listed in the Mainboard have consistently underperformed the market whereas that in the SESDAQ have outperformed the market for the first 23 months before registering a negative return. The result, especially that in the Mainboard, is consistent with an IPO market in which investors are periodically over-optimistic about the earning potential of a company seeking to be listed. That is to say, company go public when investors are irrationally overoptimistic about the future potential of the market. This is another indicator that market sentiment does play an important role.ACCOUNTANC