Allocation of reserved shares in IPO and the underpricing of IPO shares.
Suren S/O Maniam.
Chua, Jia Hao.
Tan, Wei De.
Date of Issue2013
College of Business (Nanyang Business School)
One of the main conundrums surrounding IPO is the identification of elements behind the prevalence of under-pricing. This paper investigates the rationales behind the implementation of Directed Share Program (DSP) in IPOs and its significance on the under-pricing of the issue. IPO samples are collected from 2 countries of interest, Singapore and the U.S. We postulate that implementation of DSP feature is likely due to both agency problems and its use as a reward mechanism. Results are mixed with regards to the relationship between DSP and under-pricing. Results from the Singapore analysis show no significant correlation whereas our U.S. data analysis showed indirect correlation. From our Singapore sample, we found that 8.0% of the firms reserved shares for their beneficiaries at a discount from the offering price. Our findings also show that shares reserved at a discount causes higher under-pricing in the issue. Another major finding in this paper is that agency problems are not as significant as first conceived. Allocations to insiders1 were found to not have any material effect on the first day performance of the IPO, whereas higher under-pricing occurs when shares were reserved for employees, friends, families of friends, customers and business associates instead. This particular result shows that DSP is probably used as an incentive to strengthen employee loyalty and improve strategic alliances.
Final Year Project (FYP)
Nanyang Technological University