ipo underpricing and long run performance in singapore ... · ipo performance should be measured....
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IPO underpricing and long run performance in Singapore:
does governance matter?
Kwan Chee Wai, James
BAcc (NTU), MBA (Strathclyde), MBA Investment & Finance (Hull), MBR (UWA)
This thesis is presented for the degree of Doctor of Philosophy of
The University of Western Australia
UWA Business School
Accounting and Finance
2014
i
Abstract
This study employs a composite corporate governance index, specific corporate
governance variables, and a full range of firm-specific variables to examine initial
returns and long-run performance of IPOs in Singapore. It appears to be the first study
to examine this combination of variables and to adopt both qualitative and quantitative
approaches. An initial qualitative phase involves interviews with representatives from
three major parties to an IPO transaction: issuers, underwriters, and investors. Their
views are sought on the relative importance of corporate governance, appropriateness of
particular items for the construction of a corporate governance index (CGI) and how
IPO performance should be measured. The quantitative phase examines the extent to
which the level of underpricing and long-run performance of the IPOs are associated
with: (i) corporate governance attributes, (ii) whether the IPO is VC-backed and (iii) the
lock-up period for the IPOs.
The qualitative phase reveals that interviewees see a positive relationship between
corporate governance and IPO performance in the long-run, but not in the short-term. In
addition, they feel that IPOs producing better results have the following governance
attributes: larger board size with a good mix of skills and experience among the
independent directors, a dual leadership structure, a higher level of equity ownership by
the directors after listing, backed by venture capitalists, and a longer lock-up period.
Some of the interviewees do not believe IPO performance is necessarily related to
which board the IPO is listed on – the Main or SESDAQ, though some do.
The quantitative analysis is based on IPOs listed in Singapore for the period 2000-2007.
The analysis finds that Main Board-listed IPOs perform better than those listed on the
second board. However, there is no evidence to suggest a significant relationship
ii
between IPO performances and corporate governance practices, when the CGI is used
as a proxy for the quality of corporate governance disclosure. Similarly, there is no
evidence to suggest a significant association between involvement of venture capitalists
and IPO performance. In addition, the study does not lend support to the proposition
that issuers with a longer lock-up period report lower underpricing and better long-run
performance. However, when specific board variables such as board size, CEO duality,
board independence, gender diversity and family directorship are examined, the findings
demonstrate a positive relationship between lock-up period and long-run performance.
In addition, the study finds a significant relationship between family directorship and
the underpricing of IPOs.
iii
Acknowledgements
The completion of this thesis marks the end of a long but fruitful learning journey for
me. The completion would have not been possible without the assistance, support,
guidance, and patience of many people whom I am greatly indebted to.
Firstly, I would like to express my sincere appreciation and gratitude to my supervisors,
Emeritus Professor H.Y. Izan and Professor Simone Pettigrew, who have been
incredibly patient and supportive throughout my research. Their timely, insightful, and
often thought-provoking feedback has been immensely helpful, providing me with the
much needed guidance to sharpen my thoughts and put this piece of work together.
I would also like to thank all the interviewees who gave me the opportunity to conduct
interviews with them. Their generous sharing has given me the opportunity to learn the
practical insights of Singapore IPOs and corporate governance, which led to the revision
of the Corporate Governance Index in this study.
Special thanks go to Gin, David and Dafyne, who have assisted me in gathering the IPO
and stock market data. In addition, I would also like to express my gratitude to my
classmates, Dr. Chan Seet Meng and Dr. Chang Ee Ling, who have been very
encouraging and supportive since I started writing my thesis five years ago.
Finally, I am indebted to the late Winthrop Professor David Plowman, who taught me
two of the five Master of Business Research modules. His excellent teaching and the
witty quote, “Get In, Get Done, Get Out, Get On” have been a constant inspiration to
me in completing this thesis.
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To Dad who taught me perseverance and believed I could.
To Mum who showed me discipline and said I should.
To my beloved Joyee who is always supportive and knew I would.
This thesis is dedicated to each of you.
v
Declaration
This thesis results entirely from my own research and has not been submitted for any
other degree in any other university.
James Kwan July 2014
vi
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Table of Contents
Page
Abstract i
Acknowledgements iii
Declaration v
List of Tables xi
1. Introduction 1
1.1 Background of study 1
1.2 Motivation 3
1.3 Research questions 6
1.4 Methodology and justification 7
1.5 Significance and contribution 9
1.6 Organisation of the thesis 12
2. Literature Review 15
2.1 Introduction 15
2.2 Initial public offering (IPO) 16 2.2.1 Why go public? 16
2.3 Underpricing of IPOs 17 2.3.1 The underpricing phenomenon 17 2.3.2 Explanations and empirical evidence of underpricing 18 2.3.3 Underpricing phenomenon in Singapore 33 2.3.4 Summary of evidence on IPO underpricing 35
2.4 Long-run underperformance of IPOs 40 2.4.1 Long-run performance of IPOs in major stock markets 40 2.4.2 Explanations of long-run underperformance 45
2.5 Role of the Venture Capitalist (VC) in IPOs 49 2.5.1 Certification/monitoring model 50 2.5.2 Grandstanding model 53
2.6 Lock-up period 53
2.7 Corporate governance and IPO performance 55 2.7.1 Board size 55 2.7.2 CEO duality 58 2.7.3 Board independence 61 2.7.4 Director ownership 64 2.7.5 Female directorship 66 2.7.6 Family directorship 70
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2.8 Corporate Governance Index (CGI) 74
2.9 Summary 77
3. Code of Corporate Governance in Singapore 79
3.1 Introduction 79
3.2 Code of Corporate Governance in Singapore 79 3.2.1 Background 79 3.2.2 Board matters 80 3.2.3 Board and CEO remuneration 83 3.2.4 Board accountability 84 3.2.5 Communication with shareholders 85
3.3 Summary 86
4. Hypotheses Development 87
4.1 Introduction 87
4.2 Main Board-listed IPOs vs. SESDAQ-listed IPOs 87
4.3 Corporate governance and firm performance 91
4.4 Venture Capitalist-backed (VC-backed) IPOs vs. non VC-backed IPOs 92
4.5 Lock-up period 95
4.6 Board structure 97 4.6.1 Board size 97 4.6.2 CEO duality 98 4.6.3 Board independence 99 4.6.4 Female directorship 99 4.6.5 Family directorship 101
4.7 Summary 103
5. Research Methodology and Design 105
5.1 Introduction 105
5.2 Qualitative research Phase 105
5.3 Quantitative research Phase 111
5.4 Dependent variables 115 5.4.1 Measures for underpricing 115 5.4.2 Measures for long-run performance 116
5.5 Independent variables 120 5.5.1 Corporate Governance Index (CGI) 120 5.5.2 Venture capitalist backed 121 5.5.3 Lock-up period 121 5.5.4 Board variables 121
5.6 Control variables 122 5.6.1 Firm age 122 5.6.2 Firm size 123 5.6.3 Offer size 124
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5.6.4 Time gap 124 5.6.5 Industry 124 5.6.6 Disclosure of earnings forecast 125 5.6.7 Retained equity ownership by original owner 126 5.6.8 Underwriters’ reputation 126
5.7 General model 128 5.7.1 Underpricing 128
5.8 Summary 131
6. IPO Performance and Governance: Practitioner Views 133
6.1 Introduction 133
6.2 Findings 133 6.2.1 Corporate governance and IPO performance 135 6.2.2 Main Board vs. Second Board (SESDAQ) 141 6.2.3 Board characteristics and director ownership 144 6.2.4 Role of venture capitalists (VC) 155 6.2.5 Lock-up period 156 6.2.6 Corporate Governance Index (CGI) 157
6.3 Discussion 165
6.4 Summary 173
7. IPO Performance and Governance: Data Description and Empirical Findings 175
7.1 Introduction 175
7.2 Descriptive statistics of CGI 175 7.2.1 Overall disclosure 175
7.3 IPO performances 211 7.3.1 Initial returns 211 7.3.2 Post-listing returns 221 7.3.3 Long-run performance 224
7.4 Test of IPO underpricing 237 7.4.1 Univariate results 243 7.4.2 Multivariate results 247 7.4.3 Alternative models 253
7.5 Test of post-IPO long-run performance 267 7.5.1 Univariate results 274 7.5.2 Multivariate results 279 7.5.3 Alternative models 287
7.6 Summary 299
8. Conclusion 303
8.1 Introduction 303
8.2 Qualitative results summary 303
8.3 Quantitative results summary 306
8.4 Research contributions 308
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8.5 Implications of the study 310 8.5.1 Managerial implications 310 8.5.2 Investment implications 311 8.5.3 Regulatory implications 312
8.6 Limitations of study 313
8.7 Directions for future research 316
8.8 Conclusion 318
Appendices 319
Appendix 1: Interview Guides 319
Appendix 2: Corporate Governance Index (CGI) Scorecard (Adpated from Mak (2007)) 322
Appendix 3: Corporate Governance Index (CGI) Scorecard (Revised) 325
References 328
xi
List of Tables
Table 2.1 Selected empirical evidence on initial returns from IPOs 37 Table 2.2 Selected empirical evidence on long run performance from IPOs 41 Table 5.1A Profile of interviewees – Issuers 1099 Table 5.1B Profile of interviewees – Underwriters 1099 Table 5.1C Profile of interviewees – Investors 110 Table 5.2 Sample selection criteria 112 Table 5.3 Sample distribution by year 114 Table 5.4 Sample distribution by industry 114 Table 5.5 Relationship between the independent variables and underpricing 129 Table 5.6 Relationship between the independent variables and long-run
performance 130 Table 6.1A Profile of interviewees – Issuers 134 Table 6.1B Profile of interviewees – Underwriters 134 Table 6.1C Profile of interviewees – Investors 135 Table 7.1 Summary of disclosure of CGI items among firms 179 Table 7.2 Summary descriptive statistics for CGI Scores 184 Table 7.3 Tabular distribution of the CGI Scores 187 Table 7.4 Summary of disclosure of CGI items - Main Board vs. SESDAQ 192 Table 7.5 Summary of disclosure of CGI items by industry 204 Table 7.6 Descriptive statistics for initial returns by year 213 Table 7.7 Descriptive statistics for initial returns: Main Board vs. SESDAQ 215 Table 7.8: Descriptive statistics for initial returns by industry 220 Table 7.9 Cumulative abnormal returns over the first ten days 223 Table 7.10 Long-run performance of IPOs 227 Table 7.11 Long-run performance of IPOs 231
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Table 7.12 IPO performance by industry groups 235 Table 7.13 Descriptive statistics and correlations for IPO underpricing regression
continuous variables 242 Table 7.14 Univariate tests of differences in CGI and firm characteristics between
firms with positive and negative market adjusted initial returns 244 Table 7.15 Univariate tests of differences in initial returns, CGI and firm
characteristics between firms listed on the Main Board and the SESDAQ 245
Table 7.16 Univariate tests of differences in initial returns, CGI and firm
characteristics between firms which are VC-backed and non VC-backed 246
Table 7.17 Pooled OLS regression of CGI and IPO firm characteristics on the
level of IPO underpricing 252 Table 7.18 Descriptive statistics and correlations for board structure and IPO
underpricing regression variables 255 Table 7.19 Univariate tests of differences in initial returns and board structure
between firms listed on the Main Board and the SESDAQ 257 Table 7.20 Univariate tests of differences in initial returns and board structure
between firms which are VC-backed and non VC-backed 259 Table 7.21 Univariate tests of differences in board structure between firms with
positive and negative market adjusted initial returns 260 Table 7.22 Univariate tests of differences in initial returns and board structure
between firms with female directors and without female directors on the board. 261
Table 7.23 Univariate tests of differences in initial returns and board structure
between firms with family members and without family members on board. 262
Table 7.24 Pooled OLS regression of board structure and IPO firm characteristics
on the level of IPO underpricing 265 Table 7.25 Descriptive statistics and correlations for post-IPO long-run
performance regression variables 273 Table 7.26 Univariate tests of differences in CGI and firm characteristics between
firms with positive and negative long-run returns 275 Table 7.27 Univariate tests of differences in long-run performances, CGI and firm
characteristics between firms listed on the Main Board and the SESDAQ 277
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Table 7.28 Univariate tests of differences in long-run performances, CGI and firm characteristics between firms listed which are VC-backed and non VC-backed 278
Table 7.29 Pooled OLS regression of CGI and IPO firm characteristics on the
long-run performance of IPOs 288 Table 7.30 Descriptive statistics and correlations for board structure and post-IPO
long-run performance regression variables 288 Table 7.31 Univariate tests of differences in board structure between firms with
positive and negative long-run returns 2900 Table 7.32 Pooled OLS regression of board structure and IPO firm characteristics
on the long-run performance of IPOs 2955
xiv
1
Chapter 1
Introduction
1.1 Background of study
The Initial Public Offering (IPO), also known as going public, refers to the first listing
of a company’s shares on a stock exchange. It represents a significant milestone in the
life-cycle of a company as its ownership and governance structure changes at the time
of listing (Shekar & Stapeldon 2007). IPOs are usually underwritten by investment
banks and some of these IPOs are backed by venture capitalists (Gompers 1995;
Rindermann 2004).
It is widely accepted that good corporate governance improves corporate performance
and is vital for long-term survival and growth (Davies 1999; Filatotchev et al. 2007;
Mak 2007). An IPO is the first time that a firm presents itself to potential investors for
the specific purpose of raising funds to support its proposed future operations. How the
management team presents itself is critical to the success of the IPO as the board of
directors is considered to be the most critical component of the corporate governance
structure of a company (Mak & Yuanto 2005; Haniffa & Hudaib 2006). A sound
corporate governance structure is of paramount importance to the strategic direction of
all firms, particularly so for IPOs (Kemp 2006; Li & Naughton 2007; Young & Thyil
2008). It also serves as a potent signal to investors and underwriters of the quality of a
young firm (Beatty & Zajac 1994; Hermalin & Weisbach 1998; Higgins & Gulati
1999).
Underpricing is measured by subtracting the initial stock offer price from the closing
price at the end of the first day of trading, and is expressed as a percentage of the initial
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offer price (McGuinness 1992; Bruton & Prasad 1997). Over the last three decades,
many scholars have examined the extent of the underpricing in a number of countries,
most notably in the US (e.g. Ibbotson & Jaffe 1975; Reilly 1977; Baron 1982; Rock
1986; Allen & Faulhaber 1989; Ibbotson & Ritter 1995; Ritter 2003). One of the most
widely accepted explanations for IPO underpricing is the winner’s curse model
propounded by Rock (1986), which suggests that underpricing is necessary to keep
uninformed investors in the IPO market. The model is based on the assumption that
there is information asymmetry among investors, and informed investors do not
participate in issues that are not attractive to them. Consequently, uninformed investors
may be allocated all of the unattractive shares (the winner’s curse). To attract both
groups of investors, informed and uninformed, there must be sufficiently underpricing
in the new issue (Ritter 2003; Ljungqvist 2006).
In addition to underpricing, there is extant empirical literature which examines the long-
run performance of IPOs (e.g. Ritter 1991; Loughran 1993; Loughran and Ritter 1995;
Purnanandam & Swaminathan 2004). In a highly cited study, Ritter (1991) found that
IPOs in the US significantly underperformed other companies of similar size in terms of
market capitalization three years after going public. He reported that IPO firms with the
highest average initial returns also reported the poorest long-run returns, an outcome
that is in line with ‘over reaction’ hypothesis: when investors become overly optimistic
about recent winners and overly pessimistic about recent losers (DeBondt & Thaler
1985, 1987). This overreaction leads past losers to become underpriced and past
winners to become overpriced. Ritter’s observation is also supported by Loughran
(1993), Loughran and Ritter (1995) and Purnanandam and Swaminathan (2004).
Research has also shown that IPOs that were offered in a ‘hot issues’ (high volume)
3
market tend to underperform compared to those issued during a ‘cold’ period (Loughran
& Ritter 1995).
This study, employing both qualitative and quantitative approaches, aims to examine
whether differences in corporate governance practices at the time of going public affect
the level of underpricing outcomes and long-run performance of IPOs in Singapore. In
addition, this study compares the quality of corporate governance disclosure
performance between IPOs listed on the Main Board and the Second Board, Stock
Exchange of Singapore Dealing and Automated Quotation (SESDAQ)1 with the use of a
Corporate Governance Index (CGI), as well as focusing on specific board variables.
1.2 Motivation
Many IPO studies have been conducted using data from the US and other parts of Asia,
such as Australia, Hong Kong, Japan, Korea and Malaysia. The present study focuses
on Singapore as it has been consistently ranked as one of the best for corporate
governance practices in Asia (ACGA 2005, 2007, 2010, 2012). In the latest release of
the ASEAN Corporate Governance Scorecard report, Singapore reported the largest
improvement (Asian Development Bank 2014). To enhance Singapore’s reputation as a
regional financial hub in Asia, the Singapore government maintains that sound
corporate governance structure is of paramount importance in attracting foreign
investment, improving stock market liquidity and reducing firms’ cost of capital.
In Singapore, the Corporate Governance Committee, set up by the Ministry of Finance,
announced the introduction of the Code of Corporate Governance (the ‘Code’) on 4
1 On 26 November 2007, the SESDAQ was renamed the Catalist. All the SESDAQ listed companies are now known as the Catalist listed companies. However they are still regulated by SGX under the SESDAQ regime until they have engaged a Catalist sponsor and adopted the Catalist rules (introduced in 2008).
4
April 2001. The Code defines corporate governance as the “processes and structure by
which the business and affairs of the company are directed and managed” (Code, para.
1). Listed companies are required to disclose their corporate governance practices and
provide explanations for deviations from the Code in their annual reports for Annual
General Meetings held from 1 January 2003 onwards. The Code was revised in 2005,
with more detailed disclosures and stringent requirements imposed on all listed
companies on the Singapore Exchange (SGX). The revised code applies to all listed
companies in SGX from 1 January 2007.
Singapore has enjoyed an overall positive economic growth over the past four decades
and remains as one of the most attractive investment markets in Asia (Cahyadi et al.
2004). In terms of corporate governance, Singapore is ranked highly by the Asian
Corporate Governance Association and the Asian Development Bank. This study
attempts to examine the extent of the variability of corporate governance quality across
IPOs at the same time of listing in Singapore, and whether governance quality has any
impact on IPO performance in the short and long term. To the best knowledge of the
researcher, there are no prior studies examining the association of corporate governance
practices and IPO performance in Singapore. With the revised Code introduced in 2005
which applies to all listed companies seeking listing on SGX, it offers an excellent
setting to examine the relationship between corporate governance to IPO performance.
Various measures of the strength and effectiveness of companies’ corporate governance
(Corporate Governance Index or CGI) have been developed around the world (Black
2001; Gompers, Ishii & Metrick 2003; Bai et al. 2004; Klapper & Love 2004; Bebchuk,
Cohe & Ferrell 2005; Durnev & Kim 2005; Black, Jang & Kim 2006; Chen et al. 2007;
Cheung et al. 2007). A CGI is typically constructed based on a scorecard that covers
5
various aspects of corporate governance structures, such as board size and composition,
CEO duality, management holdings, board responsibility, and performance. For
instance, Cheung et al. (2007) constructed a CGI to measure the overall effectiveness of
corporate governance practices of listed companies in Hong Kong. Their CGI contained
86 items and was constructed based on the Organisation of Economic Cooperation and
Development’s (OECD) Principles and the Code of Best Practices issued by the Hong
Kong Stock Exchange. The CGI covered five categories: rights of shareholders,
equitable treatment of shareholders, role of stakeholders, disclosure and transparency,
and board responsibilities and composition (OECD 2004).
In June 2007, the Monetary Authority of Singapore and SGX conducted a study on the
current state of corporate governance of SGX-listed companies in Singapore. A
corporate governance scorecard that closely followed the revised Code was constructed
by Professor Mak Yuen Teen from National University of Singapore (NUS) Business
School. Professor Mak applied the scorecard to 659 Mainboard and SESDAQ listed
companies to assess how well they disclosed and implemented the best practice
guidelines as set out in the Code (Mak 2007). However, the scorecard does not apply to
IPOs.
McKinsey & Company conducted a survey on global investors’ opinions on corporate
governance in 2002. Investors were found to place significant emphasis on corporate
governance when making their investment decisions and the majority of investors were
prepared to pay a premium (as high as 20-25%) for companies exhibiting high
governance standards. However, some critical questions for investors’ included: To
what extent are the corporate governance practices disclosed in IPO prospectuses? What
is the best method of measuring the degree of compliance? Are there any fundamental
6
differences in the corporate governance practices between those larger companies listed
on the Main Board of SGX and those listed on the SESDAQ? How do different
governance practices and extent of compliance with the Code affect these IPOs’
underpricing and long-run performance? These questions constitute the research gaps
addressed in the present study.
Previous studies of the ownership structure and performance of IPO firms have
indicated that a possible remedy for asymmetric information between the issuer, outside
investors and underwriters is the involvement of a venture capitalist (VC). Empirical
evidence shows that non VC-backed IPOs are characterised by greater underpricing
than VC-backed IPOs (Sahlman 1990; Gompers 1995; Lerner 1995; Gompers & Lerner
1996). Having VC representations on the board of IPO firms may ensure these firms
able to obtain further finances from the VC and also they may play an active role in the
management of the business to positively improve these firms’ performances in the
longer term (Brav & Gompers 1997). The role of the VC in both underpricing and
long-run performance of IPOs is covered in this study.
1.3 Research questions
This study adopts both qualitative and quantitative methods to examine the following
research questions:
1. What are the views of CEOs/CFOs, investment bankers/underwriters, and
institutional and retail investors in relation to the factors that are used to
construct the CGI, changes in board structures, involvement of VC, the impact
of lock-up periods, and other corporate governance practices on the underpricing
and long-run performances of IPOs in Singapore?
7
2. Do IPO firms listed on the Main Board report a different level of underpricing
and long-run performance than IPO firms listed on the SESDAQ?
3. To what extent do the corporate governance disclosures of IPO firms listed on
the Main Board and the SESDAQ conform to the Code?
4. Do VC-backed IPOs have a different level of underpricing and long-run
performance than non VC-backed IPOs?
5. Do IPOs with a longer lock-up period have a different level of underpricing and
long-run performance than IPOs with a shorter lock-up period?
6. To what extent do board variables explain the underpricing and long-run
performance of IPO firms?
1.4 Methodology and justification
Unlike numerous prior studies where quantitative approaches dominated analyses of the
association between corporate governance practices and IPO performance (e.g. Jain &
Kini 1994; Certo, Daily & Dalton 2001; Filatotchev & Bishop 2002; Klapper & Love
2004; Welbourne, Cycyota & Ferrante 2007), the present study appears to be the first to
adopt a mixed approach where both quantitative and qualitative approaches are
employed to provide a deeper understanding of the importance and impact of effective
corporate governance practices on IPO performance. Specifically, to address the first
research questions, the study included face-to-face interviews with three key parties to
an IPO transaction: CEOs/CFOs, investment bankers/underwriters, and institutional and
retail investors. The aim was to obtain their professional and practical views pertaining
8
to IPO performance and corporate governance practices and structures in Singapore. In-
depth face-to-face interviews were used as the main data collection method for
gathering qualitative information as they provide an opportunity for the interviewer to
discover rich and complex information from individuals who have relevant knowledge
in the field of corporate governance and IPO performance. In addition, the preliminary
Corporate Governance Index (CGI) was constructed to seek opinions and practical
insights from the interviewees relating to the appropriateness of the CGI, and was taken
into consideration in the final development of the CGI. The quantitative phase of the
study addressed the remaining research questions listed in the previous section.
The interviewees reported that they perceived a positive relationship between corporate
governance and IPO performance in the long-run. Most did not consider there to be a
relationship between the two in the short-term. Mixed responses were given in relation
to differences in performance between IPOs listed on the Main Board and the SESDAQ.
In relation to board structure and IPO performance, the majority of the interviewees felt
that IPOs with larger boards with a good mix of skills and experiences among the
independent directors, and those with a dual leadership structure and a higher level of
director ownership after listing, tend to perform better. The interviewees also felt that
IPOs that are VC-backed and have a longer lock-up period produce better results.
The quantitative findings showed that the Main Board-listed IPOs produced higher
initial and long-run returns compared to the SESDAQ-listed IPOs. No evidence was
found for a significant relationship between IPO performance and corporate governance
practices when using CGI as a proxy for the quality of corporate governance disclosure.
No support was found for the proposition that VC-backed IPOs report lower levels of
underpricing and better long-run performance. In regards to lock-up period, the initial
9
multivariate analysis does not suggest that issuers with a longer lock-up period report
lower underpricing and better long-run performance. However, when specific board
variables (such as board size, CEO duality, board independence, gender diversity and
family directorship) were examined, the results suggested a positive relationship
between lock-up period and long-run performance. A significant relationship between
family directorship and underpricing of IPOs was also found.
1.5 Significance and contribution
This study contributes to the existing empirical research on the role of corporate
governance and IPO performance in a number of ways. Firstly, unlike most studies that
concentrate on IPO performance in other countries such as the US, the UK, China,
Japan and other developed and emerging markets, this study focuses on Singapore,
which is one of the most active financial centres in Asia for IPOs. According to the
latest global market trend report issued by Ernst & Young (2013), Singapore is one of
the top ten most active IPO markets in the world. In terms of corporate governance,
Singapore was ranked first by the Asian Corporate Governance Association (ACGA) in
its Corporate Governance Watch Survey 2012. Thus, it was of interest to examine the
relationship between corporate governance and IPO performance in Singapore, as this
relationship has received little research attention in the past.
Secondly, as mentioned in the previous section, this study adopts a mixed methodology
in examining the relationship between corporate governance and IPO performance in
Singapore, and appears to be the first study to do so. As Singapore’s Code of Corporate
Governance adopts a “comply or explain” approach for all listed companies, it is of
interest to examine how stakeholders see the importance of corporate governance in
influencing IPO performance. This was achieved through in-depth interviews with
10
CEOs/CFOs, underwriters, and investors of IPOs. In terms of quantitative analysis, this
study appears to be the first to construct a CGI for Singapore IPOs and determine
whether the level of IPO underpricing and long-run performance is associated with the
CGI at the time of listing. In addition, this study employs classical cross-section and
time-series regression analysis for IPOs listed in Singapore between 2000 and 2007. For
robustness, multiple measures for long-run performance measures are employed,
including the use of cumulative abnormal returns, buy-and-hold returns, and wealth
relative index. The dual approach used in this study makes a significant contribution
towards understanding the extent to which corporate governance disclosure in the IPO
prospectuses has an impact on initial returns, as well as long-run performance on the
sampled IPOs.
Thirdly, while there have been many studies on the relationship between firm
characteristics - such as firm size, operating history and equity retention by owners, and
underpricing and long-term performance of IPOs in Singapore conducted over the past
two decades (Koh & Walter 1989; Saunders & Lim 1990; Lam & Chang 1994; Lee et
al. 1996; Firth & Liau-Tan 1997; Eng & Aw 2000; Wang, Wang & Lu 2003; Chong &
Ho 2007), none examines the interaction of corporate governance and IPO performance.
In addition, these studies do not analyse the extent to which the level of corporate
governance disclosure differs between those IPOs listed on the Main Board and those
listed on SESDAQ, and how this difference impacts their initial returns and long-run
performance. This is the first study that seeks to fill this research gap by addressing
these areas not covered by earlier studies.
Fourthly, the interaction of corporate governance and IPO performance is a relatively
new research area, both internationally and in Singapore. There does not appear to be
11
any published research that addresses both specific board variables and a composite
corporate governance index when measuring IPO performance, in addition to other IPO
firm variables such as venture capitalist backing and lock-up period. The closest study
that addresses corporate governance and IPO performance in Singapore was a
conference paper by Mak et al. (2002), where they examined 269 IPOs listed on SGX
between 1994 and 2001 to investigate the association of board variables such as board
size, board composition, CEO duality and family directorship, and initial returns.
However, the study was confined to specific board variables and the underpricing of
IPOs. It did not employ any composite corporate governance index or analyse the long-
run performance of the sample IPOs. Further, it did not address the gender diversity on
boards or provide a separate analysis on Main Board and SESDAQ-listed IPOs.
Therefore, this study extends Mak et al.’s (2002) work substantially by employing a
CGI in addition to specific board variables to analyse both initial return and long-run
performance of IPOs. In addition, this study appears to be the first to include gender
diversity to examine whether the level of female directorship has any significant
relationship on performance of the sampled IPOs in Singapore. In sum, this appears to
be the first study to make a significant contribution to the existing literature by
providing extensive coverage of corporate governance and numerous IPO firm
variables, as well as the association between corporate governance, firm variables and
the initial return and long-run performance of IPOs.
Fifthly, this thesis extends and updates previous IPO studies in Singapore that focused
on IPOs listed on SGX in the 1980s and 1990s, but did not focus on corporate
governance. The last empirical study focused on Singapore IPOs was by Chong and Ho
(2007), who examined 195 Main Board-listed IPOs between 1990 and 2000. They
investigated the association between lock-period and voluntary earnings forecast
12
disclosure in Singapore. Mak et al.’s (2002) study used IPOs listed on SGX from 1994
to 2001. Thus, there are no studies on Singapore IPOs for firms listed on SGX after
2001. The sample IPOs in the present study were listed on SGX from 2000 to 2007,
during which time there were many major corporate collapses globally and two general
elections held in Singapore (2001 and 2006). Indeed, the study shows that the
performance of the sample IPOs is positively affected by several government
regulations after the General Election in 2001, including the revised Code of Corporate
Governance introduced in 1998 (effective from 1 January 2003). In addition, the
General Elections in late 2001 and mid-2006 produced a positive impact on the stock
market in 2002 and 2007, respectively. Consequently, IPOs listed during these two
years report better initial returns than those floated in other sample years.
In addition to extending the current literature on the relationship between corporate
governance and IPO performance globally, the findings of this study provide some
practical insights on corporate governance to regulators, including SGX, the Monetary
Authority of Singapore, and the Securities Investors Association (Singapore). Further,
this study provides directors, underwriters, venture capitalists, and other existing and
prospective IPO domestic and international retail and institutional investors with
information on the importance of corporate governance and how they affect IPO
performance in Singapore.
1.6 Organisation of the thesis
The remaining chapters of the thesis are organised as follows. Chapter 2 reviews the
prior literature and empirical studies on initial returns and long-run performance of IPOs
in major countries. In addition, it reviews the extant literature on corporate governance
variables (such as board size, CEO duality, board independence, director ownership,
13
gender diversity and family directorship), the CGI, and the association between these
variables and firm performance. Chapter 3 provides an overview of the Code of
Corporate Governance in Singapore. Chapter 4 presents the hypotheses focusing on the
relationship between IPO performances, both initial returns and long-run performance,
and the various independent variables, including board listing, corporate governance
index, VC-backed, lock-up period, and specific board variables. Chapter 5 explains the
use of a mixed methodology and how qualitative and quantitative approaches were
employed to collect and analyse the data. Chapter 6 presents the findings of the
qualitative phase of the study, which involves 30 interviews conducted with issuers,
underwriters, and investors. Chapter 7 discusses the quantitative results of the univariate
and multivariate analyses employed to investigate the impact of corporate governance,
firm specific and other control variables on the initial returns and long-run performance
of IPOs in Singapore. Finally, Chapter 8 provides a summary of key findings, a
discussion of the theoretical and practical implications for various stakeholders of IPOs,
and outlines the limitations of the study and directions for future research.
14
15
Chapter 2
Literature Review
2.1 Introduction
This chapter presents a review of the literature on IPO issues and corporate governance.
Section 2.2 discusses some of the key reasons for going public and the associated costs.
Two interesting anomalies have been observed in relation to IPOs: underpricing at the
IPO and long-run underperformance after the IPO. Section 2.3 reviews the theoretical
explanations and empirical support for IPO underpricing while section 2.4 elaborates on
the theoretical justification and empirical evidence of long-run performance.
Previous studies on the ownership structure and performance of IPO firms suggest that a
potential remedy for asymmetric information between the issuers, outside investors and
underwriters is the involvement of a VC and the existence of a lock-up period in IPOs
(Barry et al. 1990; Megginson & Weiss 1991; Brav & Gompers 2003). Sections 2.5 and
2.6 provide a review of the literature on the role of VCs and the use of lock-up periods
and their impact on IPO performance.
Section 2.7 describes the role of corporate governance on IPO performance and section
2.8 discusses the use of CGI to assess the quality of corporate governance in many
developed countries. Section 2.9 contains a summary.
16
2.2 Initial public offering (IPO)
2.2.1 Why go public?
The decision to list is perhaps one of the most critical decisions by any business owner.
One of the advantages of going public is that firms can improve their liquidity and
marketability positions, which will assist them when requiring additional funding at a
later stage via placement or rights issues (Booth & Chua 1996; Bolton & Von Thadden
1998). Going public allows firms to increase their equity base and create more leverage
for financing growth for working capital requirements and capital projects, such as
mergers and acquisitions (Rajan 1992; Mikkelson et al. 1997; Myers 1997; Pagano et al.
1998). It also assists in minimising the cost of capital (Diamond 1991; Holmstrom &
Tirole 1993).
Another motive discussed in the literature is portfolio rebalancing by owners (Zingales
1995; Rydqvist & Hoghölm 1995; Chemmanur & Fulghieri 1999; Fischer 2000;
Stoughton & Zechner 1998). Private equity investors such as venture capitalists also
see going public as an exit route from their investment (Black & Gilson 1998; Helwege
& Packer 2001).
The decision to go public has its associated costs. Investors and the stock exchange will
demand timely and relevant information about the business and its prospects. As a listed
company, management decisions and management performances are subject to public
scrutiny. Public disclosure requirements, such as detailed operating results for
businesses or geographic segments and compensation of senior officers may be
sensitive and can potentially place the firm at a competitive disadvantage (Campbell
1979; Maksimovic & Pichler 2001). The cost of going public also includes stock
exchange listing fees, underwriting fees, accounting and auditing fees, legal fees, share
17
registry cost, advertising fees, and the preparation costs of the IPO prospectus (Yosha
1995; Pagano & Röell 1998). In sum, while going public provides one way of obtaining
finance for the company’s expansion, it is also a time-consuming and costly process.
2.3 Underpricing of IPOs
2.3.1 The underpricing phenomenon
IPO underpricing or initial returns, thought initially to be an anomalous finding, has
been widely researched by academics over the past three decades. Various theories have
been posed in an attempt to explain these findings.
Earlier studies on IPOs were based primarily on US companies and concluded that the
offer is systematically priced at a discount relative to the subsequent trading price
(Ibbotson 1975; Baron 1982; Rock 1986; Allen & Faulhaber 1989; Grinblatt & Hwang
1989; Welch 1989; Ibbotson & Ritter 1995, Chaney & Lewis 1998; Ritter 2003).
Similar studies have since been conducted across various exchanges around the world
resulting in a similar conclusion, albeit differing in the extent of the underpricing. For
example, Loughran, Ritter and Rydqvist (1994) find that the IPO underpricing
phenomenon exists in all 25 countries studied, with higher initial returns in developing
countries compared with developed countries such as the US and the UK. Ritter (2003)
examines the extent of underpricing in 38 countries and concludes that Asian IPOs
report higher average initial returns than US IPOs.
In Europe, Gajewski and Gresse (2006) conduct a study of 2,104 IPOs listed between
1995 and 2004 in 15 European countries, and report a mean underpricing at 22%.
Although all of the 15 Pan-European countries generate positive initial returns, the level
of underpricing varies from one market to another. Countries where the initial return is
18
relatively low are Austria, Belgium, France, Italy, Spain, Sweden and Turkey, while
Germany, Greece and Finland show higher than average initial returns. The lowest
average initial return is Turkey (4.62%) while the highest is Greece (46.68%). The
disparity among these countries suggests that peculiar market-specific features play a
critical role in the extent of underpricing.
A more recent study conducted by Moshirian, Ng and Wu (2010) finds that initial
underpricing exists in all of the six Pan-Asian countries from 1991 to 2004: China,
Hong Kong, Japan, Korea, Malaysia and Singapore. They find that emerging markets
such as China, Korea and Malaysia record a higher level of underpricing than the
developed markets of Hong Kong, Japan and Singapore. The differences in the
underpricing are attributed to the ‘internet bubble’ in 2000-2002, dominance of different
industries in different markets, regulatory factors, market inefficiencies and
imperfection.
2.3.2 Explanations and empirical evidence of underpricing
Ritter (1998) and Ljungqvist (2006) cite several theories and reasons for the
underpricing phenomenon. These theories are not mutually exclusive and focus on
different aspects of the relationships between the IPO issuers, investors and the
investment bankers involved in taking the firms public. The main theories discussed in
this section are presented in two broad categories: asymmetry information based and
symmetry information based (Ritter & Welch 2002).
19
Asymmetry information based theories
2.3.2.1 Winner’s curse hypothesis
Essentially, the winner’s curse hypothesis suggests that underpricing is necessary to
keep uninformed investors in the IPO market (Rock 1986). It assumes there is
information asymmetry among investors. As a result of this asymmetry, competition
only exists between these two groups of investors for ‘good’ IPOs as informed investors
do not participate in issues that are not attractive to them. This creates an adverse
selection problem where there is an excess demand for ‘good’ IPOs. Consequently,
uninformed investors may be allocated all of the unattractive shares from ‘poor’ IPOs
(winner’s curse). To attract both groups of investors, informed and uninformed, there
must be sufficient underpricing in the new issue (Ritter 2003; Ljungqvist 2006).
Rock’s (1986) model has been tested by numerous scholars (e.g. Beatty & Ritter 1986;
Levis 1990; Michaely & Shaw 1994; Kang & Hui 1994; Chowdhry & Sherman 1996).
For instance, Beatty and Ritter (1986) examine Rock’s (1986) model by monitoring
the changes in a sample of 49 investment banks’ IPO market share from 1981 to 1982 in
the US. They conclude that Rock’s assumption on information asymmetry has led to ex
ante uncertainty, which creates an opportunity for the investment banks to underprice
the IPO to entice investors to subscribe and also create a successful IPO for the issuers
in order to increase their IPO market shares. Levis (1990) examines the underpricing for
a sample of 123 UK IPOs listed between 1985 and 1989 and argues that the
underpricing of these IPOs is mainly attributable (along with small vs. larger issue) to a
combination of winner’s curse and interest costs.
Keasey and Short (1992) maintain that underpricing could simply reflect the uncertainty
faced by issuers, whereby they underprice to raise the chance of getting sufficient
20
demand. Amihud, Hauser and Kirsh (2003) tested Rock’s (1986) model by examining
284 IPOs listed on the Tel Aviv Stock Exchange between 1989 and 1993. Contrary to
the winner’s curse hypothesis, they find that IPOs are slightly overpriced for
uninformed investors, which could be due to their above-average demand for these
IPOs.
2.3.2.2 Underwriter reputation hypothesis
This hypothesis, first developed by Baron (1982), focuses on implications of agency
theory and the asymmetric information assumption. It assumes that the underwriters
(agents), who are mainly investment bankers, possess more information about the
market than the issuers (principal) and investors in relation to market conditions Issuers
are not aware of the ‘right’ offer price for their securities and thus engage underwriters
to assist in the pricing decision (Baron & Holmström 1980; Baron 1982).
For the past two decades, academic interest has been drawn towards the impact of
underwriters’ reputation on the underpricing of IPOs. Reputable underwriters are found
to be associated with lower underpricing as they may be able to reduce information
asymmetries by certifying a “high firm value to uninformed investors” (Logue 1973;
Neuberger & Hammond 1974; Beatty & Ritter 1986; Booth & Smith 1986; Carter &
Manaster 1990; How, Izan & Monroe 1995; Higgins & Gulati 1999; Li & Masulis
2004).
Logue (1973) employs a sample of 250 US IPOs listed between 1965 and 1969 to
investigate the effect of underwriter reputation on IPO performance. He concludes there
is a negative relation between underwriter reputation and the degree of underpricing.
The result is supported by subsequent studies (Neuberger & Hammond 1974; Beatty &
21
Ritter 1986; Johnson & Miller 1998; Carter & Manaster 1990; Michaely & Shaw 1994;
Schenone 2004).
By comparison, Beckman et al. (2001) obtain no evidence that underwriter reputation
influences the level of underpricing when they study the impact of underwriter
reputation on the underpricing of Japanese IPOs floated from 1980 to 1998. However,
they report that keiretsu-affiliated firms are more fully priced under the auction pricing
system (introduced in Japan in 1989) than their independent counterparts. The result is
attributed to the notion that keiretsu-affiliated firms are expected to produce stable
earnings streams and thus should be easier to price in an auction market than
independent firms.
Paudyal, Saadouni and Briston (1998) report that Malaysian IPO underwriters with a
better reputation tend to provide better long-term investment returns. In contrast, Jelic,
Saadouni and Briston (2001), based on a sample of 182 IPOs listed in Malaysia between
1980 and 1995, find that reputable underwriters tend to increase initial underpricing. In
addition, the results do not provide evidence that offers underwritten by more
prestigious underwriters are better long-term investments when compared to those
underwritten by less prestigious underwriters.
In conclusion, the underwriter reputation hypothesis posits that underwriters play a
critical role in underpricing equilibrium. Vast studies document a negative relationship
between underwriter reputation and underpricing. In some instances, better quality IPOs
tend to engage more prestigious investment bankers to signal about their value to
investors and reputable underwriters tend to select better quality IPOs to raise their
reputation and increase their market share.
22
2.3.2.3 Signalling hypothesis
In line with Rock’s (1986) and Baron’s (1982) models, the signalling hypothesis also
assumes asymmetric information among market participants. However, this model
asserts that it is issuers who know more about the firm’s value as opposed to investors
or underwriters. Essentially, if IPO firms possess more information pertaining to the
risk and return of their future investments than the investors (information asymmetry),
underpricing may be used as a signal of firm quality whereby investors can sell the
shares to the market at a higher price at a later date (Ibbotson 1975). Several researchers
have argued that underpriced IPOs ‘leave a good taste’ among investors. Thus, such
moves will enable these firms to issue more shares in their seasoned equity offerings
(SEOs) in the future (Allen & Faulhaber 1989; Grinblatt & Hwang 1989; Welch 1989).
Although underpricing can be costly, better quality firms can bear the cost as they can
recover the cost via SEOs after they have signalled to the market their real quality. As a
result, low quality IPOs are discouraged from imitating this action as they are less likely
to gain from underpricing by selling their SEOs at higher prices (Jegadeesh, Weinstein
& Welch 1993).
The signalling model has been well supported empirically and it has produced extensive
implications pertaining to the relationship between underpricing and firm value, project
risk, firm quality, SEOs and hot-cold market anomaly (e.g. Jenkinson 1990; Espenlaub
& Tonks 1998; Keasey & McGuiness 1991; How & Low 1993). Leland and Pyle (1977)
find that retained equity is used as a signal for the firm value, whereby issuers
deliberately underprice the IPO in expectation to sell the shares at a higher price at the
subsequent SEOs. Thus, IPOs that are more underpriced tend to show a higher
percentage of equity retained at point of listing and the high retention also signals to the
market that the firm has a higher value.
23
Grinblatt and Hwang (1989) extend Leland and Pyle’s (1977) model by applying a two
parameter signalling model. They argue that the degree of retained ownership per se is
insufficient to signal firm value. They find a positive relationship between underpricing
and an IPO firm’s fractional holding and firm value as the issuer can provide investment
confidence from more informed firm owners than less informed outside investors.
Keasey and McGuiness (1991) and How and Low (1993) also maintain a positive
relationship IPO underpricing and firm value in the UK and Australia markets
respectively.
Allen and Faulhaber (1988) apply the signalling model to explain underpricing and they
find that high quality IPOs tend to trade off a lower IPO price against a more favourable
interpretation of future dividends. They argue that low quality firms are less likely to
follow suit as they may not be able to declare high dividends in the future.
Welch (1989) extends the findings of Ibbotson (1975) by developing a model based on
signalling theory where he assumes that the categorisation of firms into high or low
quality is related to the underpricing phenomenon. He argues that it is the information
asymmetry between firm owners and investors that generates underpricing, and high
quality issuers use underpricing as a signalling device. Thus, he concludes that high
quality issuers underprice their IPOs initially and they will issue a substantial amount of
shares at a higher price at SEOs. He maintains that high quality issuers can signal their
superior information to investors as their incremental cost of underpricing is much
lower than firms with lower quality, and it will be difficult for low quality IPOs to
follow their pricing strategy.
24
Chemmanur (1993) provides another variant of the signalling model with respect to IPO
underpricing. High quality issuers will be tempted to maximise the level of available
information so that the information can be reflected in SEOs and thus increase expected
firm value. In order to compensate investors for their information gathering, these
issuers deliberately underprice IPOs. Chemmanur’s model is largely similar to other
signalling models mentioned as he assumes the presence of asymmetric information and
two-stage signalling. However, the model does not perceive signalling as an effective
tool for the underpricing of IPOs.
Despite the extensive support of signalling theory, there are studies that show that the
signalling hypothesis is not a critical determinant of IPO underpricing (Garfinkel 1993;
Michaely & Shaw 1994; Jenkinson & Ljungqvist 1996; Spiess & Pettway 1997). For
instance, Garfinkel (1993) examines 549 US IPOs listed during 1980 to 1983 and he
concludes that underpricing has little signalling effect on the probability of reissue and
abnormal return to the declaration of an SEO. In addition, he argues that there is no
association between underpricing and the likelihood that insiders will dispose of the
shares in the open market after controlling for ex ante uncertainty, the post-IPO
performance and partial adjustment phenomenon. Subsequent US studies by Michael
and Shaw (1994) and Spiess and Pettway (1997) also do not find support for signalling
theory on IPO underpricing.
Jenkinson and Ljungqvist (1996) raise doubts on the applicability of the signalling
model to IPO firms adopting the multiple issue strategy in Germany and the UK, where
existing shareholders benefited from pre-emptive rights to the SEO. They argue that
signalling provides no benefit to shareholders especially when the pricing of rights issue
is wealth neutral. In addition, they argue that the costs of providing underpricing signals
25
can be difficult to quantify as there are various ways to signal the value of an IPO, such
as engaging a quality underwriter, auditor or venture capitalist.
In addition to underpricing, there are other means used by issuers to signal the value of
their firm. For instance, Slovin and Young (1990) examine the relationship between
issuer and banks as a signal of firm value. They observe that banks can reduce the ex
ante uncertainty of investors about firm value by processing asymmetric information
and continuous monitoring of corporate activities. They conclude that the banking
relationship is dominated by underpricing and will be beneficial to investors as it may
signal the quality of the issuers prior to listing.
In conclusion, the signalling hypothesis suggests that issuers intentionally underprice
their IPOs to reflect the firms’ real value and this signal can be observed by investors.
This theory also posits that low quality issuers will incur more cost to imitate the actions
of their high quality counterparts. Though the model is theoretically sound, the
empirical evidences discussed above presented mixed results. This motivates further
examination on the relationship between signalling theory and underpricing.
2.3.2.4 The ex ante uncertainty hypothesis
The ex ante uncertainty hypothesis, developed by Ritter (1984) and formalised by
Beatty and Ritter (1986), is an extension of Rock’s (1986) winner’s curse hypothesis.
Beatty and Ritter (1986, pp. 215-216) argue that “as ex ante uncertainty increases, the
winner’s curse problem intensifies and subsequently, in order to participate in the IPO,
uninformed investors will demand that more money be ‘left on the table’, in the
expected value sense, via underpricing”. Thus, they concluded that the higher the ex
ante uncertainty, the higher the level of underpricing.
26
A large number of studies have tested this hypothesis over the past two decades. As ex
ante uncertainty cannot be measured directly, numerous proxy measures have been used
in the literature and these measures can be broadly classified into three categories: 1)
IPO firm characteristics, 2 2) offering characteristics and intermediaries, 3 and 3)
aftermarket variables such as trading volume (Miller & Reilly 1987) and volatility
(Ritter 1984, 1987; Ellul & Pagano 2006; Coakley, Hadass & Wood 2007). The
limitation of using aftermarket variables is that this information is not available at the
time of listing.
Generally, the studies reported that the level of ex ante uncertainty (underpricing) is
lower for IPOs that are: reporting higher sales prior to IPO (Ritter 1984), older (Ritter
1984), having a larger offer size (Beatty & Ritter 1986), backed by more prestigious
underwriters (Carter & Manaster 1990) and venture capitalists (Megginson & Weiss
1991), and having a smaller variance in aftermarket returns (Ritter 1984).
2.3.2.5 Book-building hypothesis
In the US, when a firm goes for an IPO it is required to issue a preliminary prospectus
in which a possible range of the share price is set. In order to gauge investors’ demand,
the underwriters will conduct a ‘road show’ to market an issue mainly to institutional
investors prior to the public offer. Benveniste and Spindt (1989) examine the
underwriters’ marketing process and demonstrated how the information gathered is used
2 Firm size measured by sales (Ritter 1984; Wasserfallen & Wittleder 1994; Habib & Ljungqvist 2001; Loughran & Ritter 2004), industry (Benveniste et al. 2003), and a firm’s age at the time of IPO (Ritter 1984, 1991; Carter & Manaster 1990; James & Wier 1990; Megginson & Weiss 1991; Wasserfallen & Wittleder 1994; Hamao, Packer & Ritter 2000; Habib & Ljungqvist 2001; Loughran & Ritter 2004). 3 Deal size measured by gross proceeds (Beatty & Ritter 1986; Tinic 1988; Finn & Higham 1988; Corwin & Harris 2001; Habib & Ljungqvist 2001; Aggarwal, Prabhala & Puri 2002; Su 2004), number of uses of IPO proceeds (Beatty & Ritter 1986; Beatty & Welch 1996; McGuinness 1992), number of risk factors disclosed in the prospectus (Beatty & Welch 1996; Ljungqvist & Wilhelm 2003), underwriter reputation (Tinic 1988; Carter & Manaster 1990; Megginson & Weiss 1991; McGuinness 1992; Habib & Ljungqvist 2001; Loughran & Ritter 2004), and venture backing (Megginson & Weiss 1991; Hamao, Packer & Ritter 2000; Corwin & Harris 2001; Loughran & Ritter 2004).
27
in pricing and allocating an IPO. Underwriters face a problem when collecting
information useful for pricing an IPO as investors have no incentive to disclose truthful
information before the IPO. Thus, they argue that underwriters may deliberately
underprice IPOs to induce both informed investors (institutional) and uninformed
investors (individual) to disclose their valuations truthfully during the pre-IPO period.
This is widely known as the partial adjustment hypothesis or book building process
hypothesis (Ibbotson et al. 1988). Through this process, well-informed investors obtain
more profitable allocations in exchange for providing more valuable information. This
is in contrast to the winner’s curse argument. Underpricing is argued to provide
compensation to informed investors by allocating an abnormally large proportion of
overpriced shares. This infers that better-informed investors obtain superior allocations
by being able to pick underpriced issues compared to uninformed investors with less
precise information (Aggarwal, Nagpurnanand & Puri 2002; Leite 2006).
Hanley (1993) tests the pricing and allocation scheduled proposed by Beneveniste and
Spindt (1989), and finds that partial adjustment of the IPO price takes place where the
underpricing is greater for gathering favourable, as opposed to unfavourable,
information. Cooney et al. (1999) argue that in cases where investors indicate a strong
demand for the IPO, the level of underpricing is highly dependent on the negotiating
powers of the issuer and the underwriter. Highly reputable underwriters enjoy greater
bargaining power and thus underprice the IPOs to a larger extent when compared to less
reputable underwriters.
Hanley’s (1993) study was criticised by Loughran and Ritter (2002) as they argue that
underwriters do not incorporate all public information when setting the offer price and
this contradicts the Benveniste-Spindt (1989) model. Instead, Loughran and Ritter
28
(2002) adopt a behavioural argument, namely the prospect theory (discussed in section
2.3.2.9).
Edelen and Kadlec (2005) revisit the criticism made by Loughran and Ritter (2002),
highlighting that information asymmetry may result from sample selection bias. They
conclude that negative market returns do not show any effect on revision of the offer
price, albeit negative market returns may have a critical impact on withdrawals of the
IPO. Edelen and Kadlec (2005) maintain a rational explanation that a trade-off exists
between the IPO proceeds and the probability of success of an IPO. Essentially,
aggressive pricing increases the chance of IPO failure.
Symmetry information based theories
2.3.2.6 Lawsuit avoidance hypothesis
Tinic (1998) developed the lawsuit avoidance hypothesis, which is also well-known as
the insurance hypothesis. She argues that the legal liability cost for IPOs would be high
since performing the due-diligence test can be fraught with difficulties and
uncertainties. Thus, both issuers and underwriters have to be cautious to ensure that
there is no misleading or inaccurate information in the prospectus for investors, who
may end up suing the issuers or underwriters if the IPOs fail to generate positive initial
returns on the grounds of misleading or inaccurate information. Tinic (1998) further
argues that underpricing serves as an efficient form of insurance against potential legal
liabilities of issuers and underwriters. She concludes that the lawsuit avoidance
hypothesis has three implications. Firstly, as noted above, underpricing lowers the
possibility of litigation. Secondly, underpricing lowers the possibility of an
unfavourable judgement if litigation arises. Thirdly, underpricing lowers the amount of
damages in the event of an unfavourable judgement. Other researchers have found
29
support for the lawsuit avoidance hypothesis (Lowry & Shu 2002; Lin, Pukthuanthong
& Walker 2013).
On the other hand, other studies have cast doubt over the lawsuit avoidance hypothesis
(Drake & Vetsuypens 1993; Alexander 1993; Ljungqvist 2006). For instance, Drake and
Vetsuypens (1993) analyse 93 US IPOs facing litigation for alleged misstatements in
their IPO prospectus between 1969 and 1990. They find support for the proposition that
underpriced IPOs are sued more often than overpriced firms. In addition, they gather
that underpricing is an expensive form of insurance against future litigation. In
conclusion, contrary to Titnic (1988), they argue that litigation is not triggered by a
below expectation first day price performance, but rather by news of the poor
performance of the issuers subsequent to listing. However, it must be noted that they did
not test the second and third implications concluded by Tinic (1998) in their study.
Ljungqvist (2006) argues that the lawsuit avoidance hypothesis is a second-order driver
of IPO underpricing because empirical evidence shows that this hypothesis presents
opposing results in countries such as Australia, where litigation action is very low (Lee
et al. 1996a). Studies conducted in Finland (Keloharju 1993), Germany (Ljungqvist
1997), the Netherlands (Van der Goot 2003), New Zealand (Vons & Cheung 1992), the
UK (Jenkinson 1990), Sweden (Rydqvist 1993), and Switzerland (Kunz and Aggarwal
1994) also do not find evidence to support the hypothesis.
In sum, the lawsuit avoidance hypothesis argues that issuers and underwriters
deliberately underprice IPOs to avoid litigation from investors pertaining to information
disclosure prior to floatation. This hypothesis is well supported in several US studies.
However, the hypothesis may not apply in other countries where they have different
30
regulations. In addition, underpricing by underwriters could be caused by other factors
rather than being solely due to lawsuit avoidance. Therefore, whether lawsuit avoidance
is a first-order effect on underpricing remains unclear.
2.3.2.7 Price stabilisation hypothesis
Price stabilisation occurs when the underwriter participates in the secondary market to
stabilize the price immediately following a listing. In contrast to the lawsuit avoidance
hypothesis, Rudd (1993) argues that IPOs are not deliberately underpriced, but are
priced at the expected market value. IPOs whose prices fall below the offer price are
supported and stabilised by post-IPO trading activities. As a result, these IPOs appear to
produce a positive average price increase and thus higher initial returns. Empirical
evidence shows that price stabilisation may benefit institutional investors (Benveniste,
Busaba & Wilhelm 1996; Benveniste, Erdal & Wilhelm 1998) as well as retail investors
(Chowdhry & Nanda 1996), as it serves as a put option held by IPO investors and
written by the underwriter. Price stabilisation places a floor under early post-IPO market
prices and effectively behaves like an insurance against price reduction.
Schultz and Zaman (1993) analysed 72 US IPOs listed during 1992 and applying trade
and quote-change data for the first three trading days after listing. They observe that
when IPOs trade at or below their issue price, underwriters quote higher bid prices than
any other market makers. However, they argue that price stabilization per se cannot
explain underpricing. Rudd (1993) examines a larger sample of IPOs than Schultz and
Zaman’s study by observing the distribution of initial returns for 463 US IPOs floated
during 1982-1983 over a four-week period. She found that the distribution of the first
day return was positively skewed, but as the time period increased, the distribution
31
became symmetrical. She also argues that the findings are primarily due to the delays in
observing negative initial returns generated by aftermarket support.
Asquith et al. (1998) test the price stabilization hypothesis by using a mixture of
distribution approaches, whereby they estimate the average initial returns for two
hypothesized distributions of supported and unsupported offerings. They find that
supported IPOs report a zero mean underpricing while the unsupported IPOs report an
average underpricing of 18 percent, which contradicts Rudd’s argument. Thus, the
degree of underpricing caused by price stabilisation remains a contentious issue and
warrants further research.
2.3.2.8 Hot and cold markets anomaly
Previous studies have shown that the IPO market follows a cyclical pattern commonly
known as hot and cold markets (Ibbotson & Jaffe 1975; Ritter 1984; Cook, Jarrell &
Kieschnick 2003). A hot IPO market has been characterised in the literature by an
exceptionally high volume of IPOs, significant underpricing, more instances of
oversubscription of offerings, and occasionally concentrations in specific industries
such as high technology and natural resources (Ritter 1984; Coakley, Hadass & Wood
2008). On the contrary, cold IPO markets experienced a significantly lower number of
offerings, less underpricing, and a lower rate of oversubscription (Hewlege & Liang
2004; Lowry & Schwert 2004; Derrien 2005).
This anomaly is first documented by Ibbotson and Jaffe (1975) in the US. Apart from
hot/cold IPO markets, they also examine the relationship between new IPO performance
in a calendar month and the performance of other new IPOs in the previous months.
They find that the first month performance of a ‘good’ IPO will affect the performance
32
of other IPOs listed in subsequent months, thus suggesting ‘hot’ markets are predictable.
However, they find that the timing of the new IPO is not dependent on the first month
performance of other IPOs. Ibbotson and Jaffe conclude that it would be more beneficial
for issuers to go for listing in ‘cold’ markets if their objective is to minimise the
‘amount of money left on the table’. On the contrary, they suggest that investors should
avoid IPOs following ‘cold’ markets and focus on investments in months where they
would see a higher initial return. Further, they also argue that past market performance
cannot be used as a gauge for issuers in deciding a month to offer their IPOs.
Subsequent studies by Ritter (1984) and Byrne and Rees (1994) also lend support to the
hot and cold market anomaly.
2.3.2.9 Prospect theory
Prospect theory is a behavioural theory developed by Kahneman and Teversky (1979),
contending that people place higher emphasis on their wealth changes than their level of
wealth. Loughran and Ritter (2002) test this theory using the internet bubble in 1999-
2000 as an example. They argue that existing literature fail to offer any explanation
consistent with investors’ rational behaviour. They note that most of the ‘money left on
the table’ in these internet IPOs has led to an increase in their executives’ personal
wealth. Loughran and Ritter (2002) also apply prospective theory to explain the reasons
for underwriters’ preference for underpricing over charging higher gross spreads. They
argue that for those underwriters who are able to allocate underpriced IPOs to ‘buy-side
clients’ who overpay for other services, a portion of the profits that investors obtained
from underpriced IPOs return to the underwriters’ pocket. They also conclude that
short-term abnormal returns will be higher following market rises, and such an effect
will exist in all IPOs where the selling period includes the ‘hot’ market period.
2.3.2.10 Informational cascades hypothesis
33
Welch (1992) argues that prospective investors are not only concerned about the
information relating to the IPO firms, but they are also wary about other investors
buying these shares. If an investor knows that no one is interested to invest in a
particular IPO, he may also decide not to invest even when he possesses favourable
information. Thus, the issuer may need to deliberately underprice the IPO to entice the
‘price elastic’ investors, who have the potential to attract other investors. Such
underpricing will initiate a cascading or bandwagon effect on subsequent investors who
may invest irrespective of whether they possess favourable or adverse information about
the IPO.
Ritter (2003) observes that the informational cascades hypothesis may have some
managerial implications. Under the market feedback hypothesis, if informed investors
see the IPO as a very good investment, the offer price will be adjusted upwards.
Uninformed investors may infer that these IPOs will be underpriced even though the
prices will only undergo a partial adjustment. On the contrary, if there is a cut in the
offer price this may signal to investors that there is weak demand from other investors,
and consequently may not be attracted to the shares. Thus, IPO firms may realise that
reducing the offer price will not induce investors to purchase the shares and may
postpone their offerings until market conditions improve.
2.3.3 Underpricing phenomenon in Singapore
As Singapore is a relatively small country and has not gained much attention with
respect to its IPO market for the past three decades, there are few studies on IPO
underpricing. Most of these studies concentrated on examining the effects of the
winner’s curse hypothesis (Koh & Walter 1989; Lee et al. 1996b; Reber & Fong 2006),
signalling theory (Lam 1991; Firth & Liau-Tan 1997; Reber & Fong 2006), partial
34
adjustment hypothesis (Wong & Chiang 1986), secondary market performance (Dawson
1987), privatisation of public firms (Saunders & Lim 1990), the venture capitalist in
IPO firms (Wang, Wang & Lu 2003), disclosure of intellectual capitals (Singh & van
der Zahn 2007), and intended and unintended underpricing (Uddin 2008).
Among the first scholars to examine the impact of the winner’s curse hypothesis are
Koh and Walter (1989). They argue that the IPO market in Singapore is unbiased as all
investors have an equal chance of success in their shares application and the results of
the share allocation are publicly disclosed. Thus, it provides a fertile ground to test
Rock’s (1986) model. In their study of 66 IPOs listed during 1973-1986, they conclude
that the results are consistent with the predictions in Rock’s (1986) model that
unseasoned new issues’ anomaly disappears when the transparent and well-informed
rationing process related to the new issues is incorporated into the analysis. Lee et al.
(1996b) extends Koh and Walter’s study by examining 62 IPOs made between 1987 and
1992, and they find that the initial return is 30% above the offer price, a result that is
consistent with Rock’s (1986) model. Reber and Fong (2006) subsequently argue that
the Rock’s winner’s curse hypothesis is the most significant contributor to the
underpricing phenomenon among the numerous asymmetric information based theories
contributed on underpricing.
Lam (1991) examined 74 IPOs listed on SGX from 1975 to 1988 to test the one signal
and two signals models developed by Leland and Pyle (1977) and Grinblatt and Hwang
(1989), respectively. The empirical results she gathered are consistent with Leland and
Pyle’s hypothesis, but not in line Grinblatt and Hwang’s two signals model. Firth and
Liau-Tan (1997) examine 114 Singapore IPOs listed for the period 1980-1993 and their
results support both models developed by Leland and Pyle and Grinblatt and Hwang,
albeit the significance level for the latter model is weaker.
35
Wong and Chiang (1986) review 64 IPOs floated on SGX during 1975-1984 and
conclude that greater underpricing is attributable to underwriters’ conservative pricing
policy, which results in higher losses suffered by existing investors of the issuers. They
gather that these underpricing losses are higher than those suffered by existing
shareholders in Australia, the UK and the US.
In sum, there are limited studies on the IPO market in Singapore and many of them
provide evidence that Singapore IPOs are underpriced for various reasons. To date,
there do not appear to have been any studies conducted on the relationship between
corporate governance practices and IPO underpricing and long-run performance for
Main Board and Second Board listed IPOs in Singapore and other countries. This
motivates the researcher to explore whether effective corporate governance provides
any signal to IPO underpricing and long run performance. Studies conducted in this area
will be discussed in section 2.8.
2.3.4 Summary of evidence on IPO underpricing
Table 2.1 provides a summary of the average IPO underpricing based on studies of IPOs
in 49 different countries over different periods. The magnitude of the underpricing
varies across countries, ranging from a low of 3.8% in the Netherlands to a high of
267% in China. The differences in underpricing across the various exchanges could be
due to several reasons: institutional and legal environments, use of different stock
market benchmarks, varied selling mechanisms such as auction vs. fixed price offers,
type of industries that dominated, the number of shares issued and underwriters’
reputation and the proportion of share allocation to institutional investors, and different
time periods when the stock market was experiencing highs and lows such as the pre
and post-1997 Asian financial crisis and burst of the ‘internet bubble’ between 2000 and
36
2002 (Hopp & Dreher 2007; Moshirian, Ng & Wu 2010). Countries with the lowest
underpricing tend to be those in which the IPO firms are relatively large and have long
operating histories in the industries, and the contractual mechanism used has auction-
like features (Loughran, Ritter & Rydqvist 1994; Ritter 2003). For instance,
Roosenboom, Goot & Mertens (2003) observe that Dutch IPOs report an average
underpricing of 3.8% for 64 IPOs listed in the Netherlands between 1984 and 1994 is
mainly attributed to the use of auctions as a selling mechanism in the earlier part of the
sample period (auctions were used until 1990). IPOs priced through auctions (23 firms)
report an average underpricing of 1.5%, whereas the remaining 41 fixed-price offerings
record an average underpricing of 5.1%. On the contrary, Tian and Megginson (2007)
argue that the incredibly high average initial return in China is for ‘A’ share IPOs,
which are restricted to Chinese residents, are primarily due to the high investment risks
and all of these IPOs are strictly regulated by the Chinese Securities Regulatory
Commission (CSRC). Specifically, the CSRC set a cap on the offer price and also
imposed IPO allocation quotas on retail investors. In Malaysia, the relatively high
return is due to government policy as the government requires IPO firms to reserve at
least 30% of new shares to the Bumiputera (Malays and other indigenous people in
Peninsular and East Malaysia), who represent the institutional investors at large (Jelic,
Saadouni & Briston 2001; How et al. 2007). The percentage was reduced to 12.5% in
2009.
In sum, based on the review of previous studies examining the level of underpricing,
positive returns are relatively lower in developed markets when compared to developing
markets, and returns vary from country to country.
37
Table 2.1: Selected empirical evidence on initial returns from IPOs
Country
Authors
Sample
Size
Time
Period
Average
initial return
Australia Austria Belgium Brazil Canada Chile China Cyprus Denmark Finland France Germany Greece Hong Kong India Indonesia Iran Ireland Israel Italy
Lee, Taylor & Walter (1996a) Aussenegg (1997) Rogiers, Manigart & Ooghe (1993) Aggarwal, Leal & Hernadez (1993) Kooli & Suret (2002) Aggarwal, Leal & Hernandez (1993) Chen, Choi & Jiang (2007) Tian & Megginson (2007) Gounopoulos, Nounis & Stylianides (2007) Hopp & Dreher (2007) Keloharju (1993) Hopp & Dreher (2007) Ljungqvist (1997) Kazantzis and Levis (1995) Dawson (1987) Marisetty & Subrahmanyam (2006) Hopp & Dreher (2007) Bagherzadeh (2006) Loughran, Ritter& Rydqvist (2008) Kandel, Sarig & Wohl (1999) Vedove, Giudici & Randone (2005)
266 67 28 62 971 19 1,213 1,124 51 33 80 462 180 79 21 2,713 125 279 31 27 242
1976-1989
1964-1996
1984-1990
1979-1990
1991-1998
1982-1990
1990-2006
1991-2000
1999-2002
1988-2005
1984-1989
1988-2005 1970-1993 1987-1991 1978-1983 1990-2004 1988-2005 1991-2004 1999-2006 1993-1994 1985-2004
16.4%
6.5%
10.1%
78.5%
20.6% 16.3% 213.4% 267% 23.7% 11.7% 8.7% 12.3% 9.2% 48.5% 13.8% 95.4% 6.1% 22.4% 23.7% 4.5% 20.2%
38
Table 2.1 (continued)
Country
Authors
Sample
Size
Time
Period
Average
initial return
Japan Korea Malaysia Mexico Netherlands New Zealand Nigeria Norway Philippines Poland Portugal Russia Singapore
South Africa Spain Sri Lanka Sweden
Cai and Wei (1997) Kaneko & Pettway (2003) Kim, Krinsky & Lee (1995) Mohamad et al. (1994) Yong (1997) Jelic, Saadouni & Briston (2001) Wan-Hussin (2005) Aggarwal, Leal & Hernandez (1993) Roosenboom, Goot & Mertens (2003) Firth (1997) Ikoku (1998) Emilsen, Pedersen & Saettem (1997) Sullivan & Unite (2001) Jelic & Briston (2003) Almeida & Duque (2006) Loughran, Ritter& Rydqvist (2008) Lee, Taylor & Walter (1996b) Uddin (2009) Page & Reyneke (1997) Ansotegui & Fabregat (2000) Samarakoon (2010) Rydqvist (1993) Schuster (2003)
180 469 169 65 224 182 154 37 64 143 63 68 104 140 21 40 128 322 118 99 105 224 148
1971-1992 1993-2001 1985-1989 1975-1990 1990-1994 1980-1995 1996-2000 1987-1990 1984-1994 1979-1987 1989-1993 1984-1996 1987-1997 1991-1998 1992-1998 1999-2006 1973-1992 1990-2000 1980-1991 1986-1998 1987-2008 1970-1991 1988-1998
49.0% 48.0% 57.5% 135.0% 75.0% 99.2% 83.0% 33.0% 3.8% 25.9% 19.1% 12.5% 22.7% 27.4% 10.6% 4.2% 31.3% 31.7% 32.7% 10.7% 33.5% 39.0% 18.5%
39
Table 2.1 (continued)
Country
Authors
Sample
Size
Time Period Average
initial return
Switzerland Taiwan Thailand Tunisia Turkey United Kingdom United States
Kunz & Aggarwal (1994) Drobetz, Kammermann & Walchli (2005) Huang (1999) Allen, Morkel-Kingsbury & Piboonthanakiat (1999) Naceur & Ghanem (2001) Kiymaz (1997) Keasey & Short (1992) Espenlaub & Tonks (1998) Khurshed, Mudambi & Goegen (1999) Stoll & Curley (1970) Ibbotson (1975) Ritter (1991) Ibbotson, Sindelar & Ritter (1998)
42 120 311 151 16 163 222 428 228 205 2,650 1,526 10,626
1983-1989
1983-2000
1971-1995
1985-1992
1990-1999
1990-1997
1984-1988
1986-1991
1991-1995
1957,1959,1963
1960-1969
1975-1984
1960-1992
35.8% 34.9% 42.4% 63.5% 27.8% 14.6% 14.0% 12.2% 9.7% 42.4% 11.4% 14.3% 15.3%
Note: (1) The figures were mainly extracted from Loughran, Ritter and Rydqvist (1994, 2008), Ritter (1998, 2008)
and papers published by the authors. (2) Average initial returns are measured in different manners from study to study. Essentially, in countries
where market prices are available immediately after offerings, the one-day raw return is reported. In countries where there is a delay before unconstrained market prices are reported, market-adjusted returns over an interval of several weeks are reported. All of the averages weight each IPO equally.
40
2.4 Long-run underperformance of IPOs
2.4.1 Long-run performance of IPOs in major stock markets
There are an increasing number of studies conducted to examine the long run
performance of IPOs worldwide. Most of these studies have analysed the IPOs’
aftermarket performance with respect to their mean equal-weighted and mean value-
weighted abnormal returns against a local official benchmark index or matching firms
that have been listed in the market for some time. Common methodologies employed to
measure long run IPO performance include Buy-and-hold abnormal returns (BHARs),
Cumulative abnormal returns (CARs), Wealth relative (WR) and the Fama-Fench
(1993) three-factor approach.
Table 2.2 provides a summary of the average long-run performance of IPOs based on
studies of IPOs in 25 different countries over different periods. In general, the evidence
suggests negative long-run performance of IPOs across many international markets, yet
there are instances of positive long-run performance in developed and developing
countries. Studies that report positive long-run performance of IPOs are mainly from
Asian markets such as China, Japan, Korea, Malaysia, Singapore, and Thailand.
However, the results reported are sensitive to the methods and benchmarks used to
measure these performances (Ahmad-Zaluki, Campbell & Goodacre 2007; Moshirian,
Ng & Wu 2010). The degree of underperformance, measured by BHAR, is most
significant in Australia (51%, Lee, Taylor & Walter 1996a) and Poland (51%, Jelic &
Briston 2003), followed by Brazil (47%, Aggarwal, Leal & Hernandez 1993), and
Austria (47%, Aussenegg 2006). Countries that show significant underperformance
include France (Chahine 2004), Germany (Ljungqvist 1997; Stehle, Ehrhardt &
Przyborowsky 2000), Greece (Kasimati & Dawson 2005) and Switzerland (Kunz &
Aggarwal 1994).
41
Table 2.2: Selected empirical evidence on long run performance from IPOs
Country
Authors
Sample
size
Time
period
Methodology
Benchmark
Horizon
(years)
Mean
abnormal
performance Australia Austria Brazil Canada Chile China Finland France Germany
Lee, Taylor & Walter (1996a) Da Siva Rosa, Velayuthen & Walter (2003) Aussenegg (2006) Aggarwal, Leal & Hernandez (1993) Kooli & Suret (2004) Aggarwal, Leal & Hernandez (1993) Moshirian, Ng & Wu (2010) Keloharju (1993) Chahine (2004) Ljungqvist (1997) Stehle, Ehrhardt & Przyborowsky (2000)
266 333 57 62 445 36 982 79 168 180 187
1976-1989 1991-1999 1984-1993 1980-1990 1991-1998 1982-1990 1991-2004 1984-1989 1996-1998 1970-1993 1960-1992
CAR
BHAR
BHAR FF3F
BHAR WR
BHAR
WR
CAR BHAR
BHAR
WR
BHAR FF3F
CAR BHAR
WR
BHAR
BHAR
BHAR WR
Market index Market index Market-value quintiles Book-to-market quintiles Size and book-to-market Market index Market index Size-matched firm Market index Market index Size and book-to-market Reference portfolio Market index Market index Market index Market index Size-matched firm
3
2
3
3
5
3
5
3
2
3
3
-51.26% -51.58% -2.16% -47.42% -47.0% -24.66% -25.60% -23.7% +28.01% -21.0% -9.94% -12.11% -6.0%
42
Table 2.2 (continued)
Country
Authors
Sample
size
Time
period
Methodology
Benchmark
Horizon
(years)
Mean
abnormal
performance Greece Hong Kong Japan Korea Malaysia New Zealand Poland
Kasimati & Dawson (2005) Moshirian, Ng & Wu (2010) Moshirian, Ng & Wu (2010) Kim, Krinsky & Lee (1995) Moshirian, Ng & Wu (2010) Jelic, Saadouni & Briston (2001) Ahmad-Zaluki, Campbell & Goodacre (2007) Firth (1997) Jelic & Briston (2003)
144 563 1,392 99 410 182 454 143 19
1999-2004 1991-2004 1991-2004 1985-1988 1991-2004 1980-1995 1990-2000 1979-1987 1991-1999
CAR WR
BHAR FF3F
BHAR FF3F
BHAR WR
BHAR FF3F
CAR BHAR
WR
CAR BHAR
WR FF3F
CAR WR
CAR
BHAR
Market index Market index Size and book-to-market Reference portfolio Market index Size and book-to-market Reference portfolio Market index Industry and size-matched firm Market index Size and book-to-market Reference portfolio Market index Industry and size-matched firm Market index Industry and size-matched firm Industry index Industry and size-matched firm
3
5
5
3
5
3
3
5
3
-6.4% -39.6% +2.78% +91.6% +43.02% +24.8% +22.0% +32.63% +17.86% -17.91% -66.80% -50.93%
43
Table 2.2 (continued)
Country
Authors
Sample
size
Time
period
Methodology
Benchmark
Horizon
(years)
Mean
abnormal
performance Singapore South Africa Sweden Switzerland Taiwan Thailand Turkey United Kingdom
Lee, Taylor & Walter (1996b) Moshirian, Ng & Wu (2010) Page & Reyneke (1997) Loughran, Ritter & Rydqvist (1994) Kunz & Aggarwal (1994) Huang (1999) Allen, Morkel-Kingsbury & Piboonthanakiat (1999) Durukan (2002) Levis (1993) Khurshed, Mudambi & Goergen (1999) Espenlaub , Gregory & Tonks (2000)
132 384 118 162 42 311 151 173 712 240 588
1973-1992 1991-2004 1980-1991 1980-1990 1983-1989 1971-1995 1985-1992 1990-1997 1980-1988 1991-1995 1985-1992
WR
BHAR FF3F
BHAR WR
BHAR
AR
CAR
CAR
BHAR
CAR BHAR
WR
CAR BHAR
CAR
Market index Market index Size and book-to-market Reference portfolio Sector indices Size and P/E ratio-matched firm Market index Market index Market indices Market index Market indices Market indices Market index CAPM Size control portfolio Multi-index model FF3F RATs
3
5
4
3
3
4
3
3
3
3
5
+13.68% -3.52% -13.1% +1.2% -6.1% -23.9% +10.02% +29.66% -31.0% -17.81% -17.62%
44
Table 2.2 (continued)
Country
Authors
Sample
size
Time
period
Methodology
Benchmark
Horizon
(years)
Mean
abnormal
performance United States
Ritter (1991) Loughran (1993) Loughran & Ritter (1995) Brav & Gompers (1997) Carter, Dark& Singh (1998) Gompers & Lerner (2003)
1,526 3,656 4,753 4,341 2,292 3,661
1975-1984 1967-1987 1970-1990 1975-1992 1979-1991 1935-1972
CAR WR
CAR WR
BHAR
WR FF3F
BHAR WR
BHAR
CAR BHAR FF3F
Market indices Industry and size-matched firm Small firm index Market index Market indices Size-matched firms Size and book-to-market portfolio Market indices Industry portfolio Size and book-to-market portfolio Market index Market index Size and book-to-market portfolio
3
6
5
5
3
5
-29.13% +17.29% +15.7% +44.6% (VC-backed) +22.5% (nonVC-backed) -19.92% +2.1% -21%
Note: (1) The figures were mainly extracted from Zaluki (2005), Gajewski & Gresse (2006) and papers published by the authors. (2) The main long run performance measures employed by researchers include Cumulative abnormal return (CAR), Buy-and-hold abnormal return (BHAR), Wealth relative (WR) and
Fama-French three-factor model (FF3F). (3) Mean monthly equal weighted returns are presented for CAR and BHAR, and are market-index adjusted as appropriate.
45
2.4.2 Explanations of long-run underperformance
2.4.2.1 Heterogeneous expectations hypothesis
The heterogeneous expectations hypothesis is introduced by Miller (1977), who relaxes
the investors’ homogeneous expectations assumption and, instead introduces the notion
of divergence of opinion among investors. He argues that IPO markets are restricted
with short selling and share prices are determined by optimistic investors who are
confident about the IPO firms’ future cash flows and growth potential, especially for
small and high growth IPOs. As more information becomes available over time and
when restriction weakens, share prices will be adjusted as the divergence of opinion
between optimistic and pessimistic investors narrows. When the growth potential cannot
be sustained in the long-run, investors will revalue the firm downwards in line with the
lower returns reported in the long-term. Thus, Miller posits that the heterogeneous
expectations among investors will translate into greater short-term overvaluation and
hence greater long-run underperformance. This hypothesis also gains support from
Ritter (1991, 1998), Brav and Gompers (1997), Teoh, Welch and Wong (1998), Rajan
and Servaes (1994) and Houge et al. (2001).
2.4.2.2 Fads hypothesis
In a similar vein to the overreaction hypothesis developed by De Bondt and Thaler
(1985, 1987),4 Aggarwal and Rivoli (1990) extend the heterogeneous expectations
argument and maintain that IPO markets are filled with fads and quite often the
investment bankers (the impresarios) deliberately underprice IPOs to create the
impression that the IPOs are oversubscribed. 5 They find evidence of IPOs
4According to De Bondt and Thaler, investors become overly optimistic about recent winners and overly pessimistic
about recent losers. These overreactions lead past losers to become underpriced and past winners to become overpriced.
5 A fad is an irrational and temporary overvaluation of the share price, which is attributed to the over-optimism of investors’ that ultimately falls apart or cause a long-run decline in returns (Naceur & Ghanem 2001).
46
underperforming over a longer time horizon. This hypothesis predicts that IPOs with the
highest first-day gains will report the lowest subsequent returns (Shiller 1990; Lee,
Shleifer & Thaler 1991).
Ritter (1991) tests the fads hypothesis by examining the three-year post-IPO
performance of 1,526 US IPOs floated during 1975-1984 and compares their
performances with matched firms by industry and capitalization. He finds evidence that
is in line with the fads hypothesis whereby many firms are listed near the peak of
industry-specific fads. In addition, he finds that investors who had invested at the end of
the first trading day after listing lost 17% of their return over the three year period when
compared to investing in a group of matched firms. Further, he observes that younger
issuers and firms that went public in massive volume years underperform in the long-
term. Thus, he concludes that his findings are consistent with the fads hypothesis
developed by Aggarwal and Rivoli (1990) as investors are overconfident about the
issuers’ prospect and have overpaid initially. This phenomenon is also observed in a
similar study conducted by Levis (1993) in the UK IPO market.
2.4.2.3 Windows of opportunity (timing) hypothesis
The windows of opportunity (timing) hypothesis, introduced by Ritter (1991) and
Loughran and Ritter (1995), is an extension of the fads hypothesis introduced by
Aggarwal and Rivoli (1990). Essentially, this hypothesis predicts that due to the
existence of an imperfect market, if issuers can successfully time their IPO during a
bullish stock market, these IPOs have a higher chance of being overvalued and
experience more severe long-run underperformance than other IPOs.
47
Loughran and Ritter (1995) examine 4,753 US IPOs that went public during 1970-1990
and find that firms tend go for listing when they see their listed competitors are trading
at high earnings and market-to-book value multiples. On the other hand, investors tend
to perceive that firms with recent good operating performance will continue to show
improved long-term performance and thus they are more likely to invest in these IPOs.
Consequently, they find that these IPOs generated only an average return of five percent
per annum and seven percent per annum for these IPOs going for SEOs. They also find
that on average investors have to invest 44 percent more in these IPOs than non-issuers
of the same size to maintain the same wealth five years after listing. Thus, they
conclude that the window of opportunity hypothesis holds well in that these IPOs are
overvalued in the short-run and severely undervalued in the long-term. This hypothesis
has been well supported by studies conducted by Lerner (1994), Loughran and Ritter
(1997) and Helwege and Liang (2004).
2.4.2.4 Earnings management
Prospective investors rely heavily on the prospectuses issued by IPO firms when
making investment decisions as they know little about these firms prior to IPO (Chaney
& Lewis 1998). Thus, in order to minimise the risk of IPO failure, managers of IPO
firms have a strong incentive to give the impression to investors that the firms perform
reasonably well prior to IPO and demonstrate strong growth in the long-run (Teoh,
Welch & Wong 1998; Healy & Wahlen 1999). Earnings management is more likely for
firms that perform extremely well or exceptionally poor (Beneish 2001).
The earnings management hypothesis assumes that investors are not able to value the
firm’s real economic performance at the time of IPO. They will overvalue these IPOs
and if the IPO firms are unable to sustain their performance in the long-run, investors
48
will adjust their valuation on these firms downwards and alter their investment
portfolios (Loughran & Ritter 1997; Rangan 1998).
2.4.2.5 Measurement issues and problems
Empirical evidence on IPO long-run underperformance has been well documented
worldwide and the mixed results obtained could be partly attributable to measurement
issues and problems. Most studies have examined the subsequent performance of firms
for at least three years post the first day of trading (Ritter 1991). Some studies have
examined the aftermarket performance of IPOs up to five years from listing (Brav &
Gompers 1997; Cai & Wei 1997; Firth 1997; Kooli & Suret 2004).
Various papers have also elaborated on how long-run performance should be measured
against the benchmark, such as the local official market index, industry index, size-
matched and book-to-market matched portfolios (Loughran & Ritter 1995; Eckbo et al.
2000; Gompers & Lerner 2003). Most of the past studies have adopted either the event-
time or calendar-time approach. The most widely used measures for the event-time
approach are the cumulative abnormal return (CAR), the buy-and-hold abnormal return
(BHAR), and the wealth relative (WR). CAR and BHAR can be applied to the returns
of IPOs on an equal-weighted return or value-weighted return basis. For calendar-time
analysis, the Fama-French (1993) three-factor model is the most widely used measure.
The literature review in this chapter focuses mainly on the above metrics, albeit several
studies employed alternative methods such as the Ibbotson (1975) Returns Across
Securities and Times (RATS) model, Carhart (1997) model, Eckbo et al. (2000) model,
decomposition method (Jakobsen & Sorensen 2001), and non-parametric test of
stochastic dominance (Ho 2003; Abhyankar, Ho & Zhao 2005).
49
Fama (1998) and Mitchell and Stafford (2000) maintain that CAR and time-series
regressions are less prone to spurious rejections of market efficiency than BHAR. This
is because BHAR can magnify underperformance due to the compounding of single
period returns. In addition, BHAR increases the likelihood that the long-term returns are
positively skewed and demonstrates rebalancing bias (Barber & Lyon 1997; Kothari &
Warner 1997; Limmack 2003). Consequently the mean BHAR is often based on a
bootstrapping approach that cannot solve all dependence problems, leading to
potentially biased test statistics (Coakley, Hadass & Wood 2008). On the contrary,
Gompers and Lerner (2003) argue that the use of CAR tends to misrepresent
performance when returns are highly volatile and thus may not be suitable for markets
that present high volatility. Brav, Geczy and Gompers (2000) argue that the use of CAR
or BHAR mainly depends upon the implicit trading strategy that is being assumed.
Prior studies reveal that the long-run performances of IPOs are sensitive to the
benchmarks used (Loughran & Ritter 1995; Brav & Gompers 1997; Brav, Geczy &
Gompers 2000; Schuster 2003; Drobetz, Kammermann & Wälchi 2005). For instance,
using the local official market index may yield an underestimation of underperformance
as it includes existing firms listed in the market for some time (Loughran & Ritter
2000). Several scholars argue that benchmarks that utilise matching characteristics, such
as size and book-to-market, produce more reliable outcomes (Banz 1981; Rosenberg,
Reid & Lanstein 1985; Fama & French 1992; Stehle, Ehrhardt & Przyborowsky 2000).
2.5 Role of the Venture Capitalist (VC) in IPOs
Previous studies of the ownership structure and performance of IPO firms have
indicated that a possible remedy for asymmetric information between the issuer, outside
investors and underwriters is the involvement of a VC (Barry et al. 1990; Megginson &
50
Weiss 1991; Jain & Kini 1995). Having VC representation on the board of IPO firms
may ensure these firms are able to obtain further finance from the VC, and VCs may
play an active role in the management of the business to assist the IPO firms to improve
their performances in the long-term (Brav & Gompers 1997).
2.5.1 Certification/monitoring model
Most literature on VC-backed companies has focused on the VC
certification/monitoring model (Barry et al. 1990; Sahlman 1990; Megginson & Weiss
1991; Jain & Kini 1995; Brav & Gompers 1997; Francis & Hasan 2001; Li & Masulis
2004; Coakley, Hadass & Wood 2008). Non VC-backed IPOs are characterised by
greater underpricing than VC-backed IPOs (Megginson & Weiss 1991; Francis &
Hasan 2001). Sahlman (1990) gives two reasons why VCs can play a better
certification/monitoring role than other third parties. First, VCs are much better versed
on the issuing firm as to their equity holdings, often holding board seats and enjoying
longer and closer working relationships with the management team compared with other
financial intermediaries. Second, the reputation factor can control possible false
certification by the VC.
In addition to the certification role during the IPO process, this model also accounts for
the monitoring role played by VCs for those firms that they have an equity stake in.
From the agency theory perspective, VC firms can monitor their portfolio companies.
This could be in the form of stage financing, board membership and detailed legal
contracts (Gompers 1995; Lerner 1995; Gompers & Lerner 1996). VC firms can also
contribute their expertise in spearheading new start-ups. As many VCs continue to hold
significant equity stakes and board seats for one to two years, they could actively advise
their portfolio companies and help with further growth.
51
The certification/monitoring model has been extensively examined in the literature for
both US firms (Barry et al. 1990; Sahlman 1990; Megginson & Weiss 1991; Jain &
Kini 1995; Lin 1996; Brav & Gompers 1997; Gompers & Lerner 1997; Francis &
Hasan 2001; Li & Masulis 2004) and firms located in other countries such as Australia
(Da Silva, Velayuthen & Walter 2003), France (Rindermann 2004), Germany (Kraus
2002; Franzke 2003; Rindermann 2004), Japan (Hamao, Packer & Ritter 2000),
Singapore (Wang, Wang & Lu 2003) and the UK (Rindermann 2004; Coakley, Hadass
& Wood 2008). The results for the test of the certification model are mixed in both US
and international studies. For instance, Megginson and Weiss (1991) find that VC-
backed firms are able to attract higher quality underwriters and more favourable
auditors’ report, enabling an issuing firm to reduce its costs of going public through
lower underpricing and lower underwriter compensation. Francis and Hasan (2001) use
a different methodology, and also find that VC-backed IPOs experience a higher degree
of underpricing than their non VC-backed counterparts. In addition, they find that a
large portion of the first-day returns is attributed to intentional underpricing in the
premarket.
In contrast, Jain and Kini (1995) report worse operating performance of VC-backed
companies in the post-IPO year compared with non VC-backed IPOs, which they
attribute to the VC certification reducing the need for excellent operating performance
to impress public investors. Furthermore, they confirm the monitoring role of VC firms
after the IPO to post-IPO operating performance. They find that VC-backed companies
perform better in the post-IPO period, though the difference declined gradually with
firm aging. The degree of superior performance is positively associated with the VC
quality.
52
Brav and Gompers (1997) apply the BHAR and Fama-French (1993) three-factor model
to examine the long run performance of 934 VC-backed IPOs and 3,407 non VC-
backed IPOs listed during 1972-1992 and 1975-1992 respectively. Based on equal-
weighted returns, they conclude that VC-backed IPOs outperform non VC-backed IPOs
over a five-year period. They argue that the Fama-French (1993) model fails to explain
the underperformance of small non VC-backed IPOs, and that IPOs do not
underperform when the issuing firms are matched on size and book-to-market portfolios.
In Singapore, Wang, Wang and Lu (2003) find that VC-backed IPOs are able to attract
high quality underwriters and the post-IPO operating performance of VC-backed
companies is inferior though they are less underpriced. However, contrary to the
findings of Megginson and Weiss (1991), they find that underwriters were unwilling to
lower their charges based on VC certification, thus providing partial support for the
certification model in the Singapore context. Possible reasons for the divergent findings
between Wang, Wang and Lu (2003) and Megginson and Weiss (1991) could be that
the Singapore VC market is relatively less mature than in the US, resulting in a
relatively small sample. The sample size selected by Wang, Wang and Lu (2003) is only
a quarter of the sample size selected by Megginson and Weiss (1991).
In sum, the use of different methodologies by numerous studies over different time
spans provides mixed results. However, most of the studies mentioned above support
the contention that VC-backed IPOs outperform their non VC-backed counterparts in
many countries.
53
2.5.2 Grandstanding model
The grandstanding model relates to the positive role in monitoring VC firms, but on a
post hoc basis. It was first developed by Gompers (1996) in his study of 433 US IPOs
listed during 1978-1987 and the model hypothesises that new or young VCs are more
likely to be motivated to signal their ability and reputation to potential investors by
bringing investees to the public sooner than veteran VCs. For new VC firms lacking a
strong reputation, the performance of their first funds becomes critical to the success of
their subsequent fundraising. The inexperience of young VC firms and thus less value-
added support may further contribute to the poor performance of their IPO portfolios.
Lee and Wahal (2004) examine the grandstanding model by reviewing 6,413 US IPOs
listed during 1980-2000, of which 2,383 are VC-backed IPOs. They gather that VC-
backed IPOs report higher initial day returns compared to non VC-backed firms and the
average return difference ranges from 5.01 to 10.32 percent. They find that VCs who
conduct IPOs that enjoy higher initial returns are able to get a higher amount of capital
for their venture capital funds in the future, thus supporting the grandstanding model.
Wang, Wang and Lu (2003) find that IPOs backed by younger VC firms report higher
underpricing than their older counterparts, thus providing further support for the
grandstanding model.
2.6 Lock-up period
Many IPOs provide lock-up periods that prohibit insiders or existing shareholders from
selling their shares within a specified period after the offering date to help prevent a
huge sell off of shares hitting the market all at once (Bartlett 1995; Aggarwal, Krigman
& Womack 2002; Yong 2007).
54
During the 1990s, most US IPOs had a standard lock-up period of six months (Mohan
& Chen 2000; Field & Hanka 2001; Brau et al. 2004). In contrast, the lock-up period in
the UK is diverse and in many instances there are separate lock-in agreements for
different groups of initial shareholders and certain companies are subject to compulsory
lock-in periods (Espenlaub et al. 2001). In Singapore, the SGX states the share
moratorium periods for the Main Board and SESDAQ-listed IPOs are six and twelve
months, respectively. For certain IPOs, a secondary lock-up period may be applied after
the expiry of the first lock-up period. Essentially, pre-IPO shareholders in Singapore are
prohibited from disposing of any of their shares during the first lock-up period and they
are allowed to dispose a fraction of their shares during the second lock-up period,
provided the aggregate shareholding is at least 50% after the disposal (Chong & Ho
2007). 6
Leland and Pyle (1977) developed a model whereby the proportion of equity retained by
insiders at the time of the IPO shows a sign of commitment to the quality of their
companies. In a similar vein, Courteau (1995) extends the model propounded by
Leyland and Pyle to voluntary lock-up. She argues that highly valued firms signal their
quality by agreeing to longer lock-up period as this imposes a cost to insiders who are
holding undiversified portfolios.
The impact of the lock-up period on IPO underpricing has gained academic attention in
recent years, with studies conducted in the US (Mohan & Chen 2001; Keasler 2001;
Aggarwal, Krigman & Womack 2002; Brav & Gompers 2003; Arthurs et al. 2006),
Germany (Bessler & Kurth 2004), the UK (Espenlaub et al. 2001; Goergen, Renneboog
6 The lock-up period is called the lock-in period and share moratorium period in the UK and Singapore respectively.
55
& Khurshed 2006) and Malaysia (Wan-Hussin 2005). All these studies report that the
shorter the lock-up period, the higher the degree of underpricing.
2.7 Corporate governance and IPO performance
Sound corporate governance structure is of paramount importance to the strategic
direction of all firms, particularly at the time of the IPO. It also serves as a potent signal
to investors and underwriters of the quality of a young firm (Beatty & Zajac 1994;
Hermalin & Weisbach 1998; Higgins & Gulati 1999; Certo, Daily & Dalton 2001).
IPOs that come with an appropriate board structure tend to be evaluated more
favourably by initial shareholders and this favourable evaluation may lead to less
underpricing (Carter, Dark & Singh 1998; Certo, Daily & Dalton 2001).
2.7.1 Board size
Extant literature and empirical evidence have shown that board size is one of the most
critical board structure variables that affect firm performance (Yermack 1996; Mak &
Yuanto 2005; Haniffa & Hudaib 2006; Guest 2009). More specifically, there is a wide
debate on what is considered a reasonable board size to strike a balance between cost
and benefits in maximizing financial performance (Lipton & Lorch 1992; Jensen 1993).
Proponents of resource dependency theory argue that firms with a larger board size may
improve firm performance (Pearce & Zahra 1992; Goodstein, Gautum & Boeker 1994;
John & Senbet 1998; Kiel & Nicholson 2003; Haniffa & Hudiab 2006; Yawson 2006;
Lehn, Sukesh & Zhao 2009). Their arguments are based on three factors. Firstly, larger
boards are often associated with diversity in experience, competency and wider business
contacts among the directors, which enables firms to secure critical and limited
resources such as materials, manpower, finances and business deals (Pearce & Zahra
56
1992; Goodstein, Gautum & Boeker 1994; Haniffa & Hudiab 2006). Secondly, larger
boards may be able to provide better advice to management in making critical business
decisions, both operational and strategic (Yawson 2006). Thirdly, due to the diversity of
experience and expertise found in larger boards, managerial decisions will be more
closely monitored and scrutinized, which promotes goal congruence and reduces
dysfunctional behaviour among managers (John & Senbet 1998; Kiel & Nicholson
2003; Lehn, Sukesh & Zhao 2009).
A contrary theoretical view is that larger boards may be ineffective in improving
financial performance (Lipton & Lorch 1992; Sonnenfeld 2002). The reasons are
twofold. Firstly, firms with larger boards imply higher directors’ fees and other
perquisites when compared to firms with smaller boards. Additional costs may also be
incurred in arranging and co-ordinating board meetings (Jensen 1993). Secondly,
having larger boards may prolong the time in decision-making due to diverse and
controversial views raised by various board members. On the other hand, it may
promote a free-riding problem as not every director may be as outspoken (Lipton &
Lorsch 1992). Both consequences may lead to undesirable outcomes, so the incremental
benefits obtained from larger boards may not outweigh the much higher cost incurred.
Specifically, prominent scholars such as Lipton and Lorsch (1992), Jensen (1993), and
Firstenberg and Malkiel (1994) argue that the ‘ideal’ board size that improves efficiency
in decision-making and ensures cost effectiveness should be around eight or nine
members. In addition, Yermack (1996) observes that board size reduction may be used
as an alternative to improving troubled companies caused by institutional investors,
dissident directors and corporate raiders. Further, theory and empirical evidence
suggest that smaller IPO firms have greater benefits from increasing the board size, as
57
these smaller firms experience a higher degree of uncertainty when compared to larger
firms (Daily & Dalton 1993; Eisenberg, Sundgren & Wells 1998; Cheng 2008). Thus,
increasing the board size from six to seven directors in a small firm will be more
effective than increasing the board size from twelve to thirteen in a larger firm (Dalton
et al. 1998; Certo, Daily & Dalton 2001).
Empirical evidence covering the association between board size and financial
performance is rather mixed (e.g. Yermack 1996; Ferris, Jaganathan & Pritehard 2003;
Adams & Mehran 2005; Haniffa & Hadaib 2006; Cheng, Evans & Nagarajan 2008;
Henry 2008; Guest 2009). For instance, Yermack (1996) examine 452 large US firms
between 1984 and 1991 to ascertain the relationship between board size and firm
performance, as measured by Tobin’s Q. After controlling firm specific characteristics
such as firm size, growth prospect, industry specifics and director shareholding, a
negative relationship between board size and firm performance was found for those
corporations having a board size of between four and ten members. Yet there is no
relationship between the two when the board size exceeds ten. His findings are also
supported by other US studies (Vefeas 1999a, 1999b; Cheng 2008; Cheng, Evans &
Nagarajan 2008; Coles, Daniel & Naveen 2008).
In the context of IPOs, in line with the signalling theory, Certo, Daily and Dalton
(2001), Mak et al. (2002), Yatim (2011) and Darmadi and Kunawan (2013) find that
board size is negatively associated with IPO underpricing. However, Mnif (2009)
examines 133 IPOs listed in France during 2000-2004 and concludes that board size has
a positive effect on underpricing. He finds that smaller board can reduce investors’ ex
ante uncertainty with respect to firm value and has a positive impact to the pricing of an
IPO. This result is also supported by the study of 37 African IPOs conducted by Hearn
58
(2011). On the contrary, Howton, Howton and Olson (2001) and Lin (2005) do not find
any significant relationship between the two variables in their study of 412 US and 320
Australian IPOs respectively.
The relationship between board size and post-IPO performance has also been examined
in Australia and France. For instance, Lin (2005) report that there is a positive and
significant relationship between board size and post-IPO long-run performance in
Australia, suggesting that IPO firms with larger boards outperform those with smaller
ones in the long-run. On the contrary, Boubaker and Mezhoud (2012) find a positive
correlation between board size and IPO performance in France, but only to the extent of
one year after listing.
2.7.2 CEO duality
CEO duality refers to firms appointing one individual playing the role of CEO and
Chairman of the firm. Essentially, the CEO is responsible for running a firm and is
involved in both operational and strategic decisions while the Chairman is mainly
responsible for managing the board, which includes nominating new board member,
reviewing senior management performance and setting the agenda for board meetings
(Laing & Weir 1999).
Stewardship and resource dependence theorists contend that CEO duality can improve
firm performance and thus increase shareholders’ wealth (Donaldson & Davis 1991;
Daily & Dalton 1997; Weir, Laing & McKnight 2002; Haniffa & Cooke 2002; Bozec
2005; Haniffa & Hudaib 2006). Essentially, they argue that a CEO who also assumes
the role of Chairman tends to be more knowledgeable and experienced compared to the
dual CEO and non-executive Chairman structure (Weir, Liang & McKnight 2002).
59
Thus, unitary leadership can minimise potential conflict with less board interference and
provide unambiguous corporate leadership in decision-making and mapping the firm’s
operating strategies in a more efficient manner (Anderson & Anthony 1986; Haniffa &
Cooke 2002; Haniffa & Hudaib 2006). In addition, CEO duality reduces remuneration
(Vefeas & Theodorou 1998) and promotes accountability for the firm’s performance
(Bozec 2005).
On the other hand, separation of the CEO and Chairman roles is widely perceived by
agency theorists to be crucial in improving corporate governance, as it has been
advocated by a number of international corporate governance codes such as the
Australian Stock Exchange Recommendations (2003) and the UK Combined Code
(2003). Essentially, the separation signals to investors that there is an appropriate
balance of power and increased accountability. In addition, the separation may reduce
uncertainty when it comes to succession planning: it is more difficult to find a person
who can assume a dual role as opposed to a single role. Further, as the board’s role
includes appointing and monitoring the CEO and ascertaining his or her remuneration,
problems may arise when the single CEO-Chairman leadership exists (Fama & Jensen
1983; Lorsch & MacIver 1989; Shleifer & Vishny 1997). Thus, proponents of agency
theory argue that firms with dual leadership will improve board independence by
ensuring more effective checks and balances over managerial behaviour (Lipton &
Lorsch 1992; Haniffa & Cooke 2002). Other scholars suggest that it will be easier to
remove an under-performing CEO when dual leadership exists in the firm (Jensen 1993;
Monks & Minow).
In view of the recent corporate scandals in the US and many other countries, more
regulatory bodies are supportive of having a dual leadership structure. In addition,
60
recent code changes in Australia and the UK extend beyond just a separation of the two
roles. According to Jensen (1993), having two separate individuals assuming the role of
CEO and Chairman may be advantageous from a monitoring perspective and it will help
to reduce the level of underpricing.
Empirically, the evidence on the separation of CEO and Chairman and firm
performance provides mixed results (e.g. Chaganti, Mahajan & Sharma 1985; Rechner
& Dalton 1991; Daily & Dalton 1993; Pi & Timme 1993; Brickley, Coles & Jerrell
1997; Ho & Williams 2003; Haniffa & Hudaib 2006). This could be due to different
measures being used as proxies for financial performance and these measures may not
be suitable in measuring any relationship between CEO duality and firm performance
(Fosberg 1999). For instance, accounting measures such as ROA and ROI may be
significantly affected by macroeconomic factors such as changes in interest rates and
other regulatory policies imposed by the government, which are beyond the control of
the CEO. In addition, some studies focus only on specific industries such as retail (e.g.
Chaganti, Mahajan & Sharma 1985) and banks (e.g. Pi & Timme 1993), and the results
gathered may not be generalized to other industries. Further, some studies do not control
for industry effects and firm specific characteristics (e.g. Rechner & Dalton 1991).
Empirical evidence on the association between CEO duality and IPO performance does
not unequivocally support any specific theory. Certo, Daily and Dalton (2001), Howton,
Howton and Olson (2001), Mak et al. (2002) and Filatotchev and Bishop (2002) find no
significant relationship between CEO duality and IPO underpricing. However, a more
recent study conducted by Chahine and Tohmé (2009), based on a sample of 127 IPOs
from 12 Middle East and North African countries, found that firms with CEO duality
61
report a higher level of underpricing, which suggests that investors view CEO duality as
an undesirable board structure and may pose agency problems.
In regards to post-IPO performance, Balatbat, Taylor and Walter (2004) report a
positive correlation between separation of CEO and Chairman roles and post-IPO
performance. However, Lin (2005) finds no significant relationship between the two.
Interestingly, Boubaker and Mezhoud (2012) find a significant relationship between the
two, but only to the extent of the first two years after listing if CAR is employed to
measure long-run performance, and one year after listing if BHAR measurement is
used.
2.7.3 Board independence
Proponents of the agency, resource dependence and signalling theories argue that a
higher level of board independence can reduce agency and informational asymmetry
problems (Fama 1980; Hermalin & Weisbach 1991; Lipton & Lorsch 1992; Jensen
1993). Firstly, having outside directors is thought to allow more independent judgement
to board decisions and improve the monitoring of performance of executive directors
(Fama 1980; Fama & Jensen 1983; Cadbury Report 1992; Chhaochharia & Grinstein
2009). Secondly, based on their wealth of experience, expertise, business network and
reputation, outside directors will be able to provide sound advice and assist the firm in
procuring limited resources and sealing business deals in a more efficient and cost
effective manner (Pfeffer & Salancik 1978; Kesner 1988; Haniffa & Hudaib 2006;
Baranchuk & Dybvig 2009). Specifically, board members’ reputation plays a strategic
role in enabling firms to raise sufficient finance as they signify the performance
potential of the firm (Certo, Daily & Dalton 2001). Pfeffer and Salancik (1978, p. 145)
argue that “Prestigious or legitimate persons or organizations represented on the focal
organisation’s board provide confirmation to the rest of the world of the value and
62
worth of the organization”. Thirdly, having more independent directors assists in
reducing information asymmetry and provides credible signals to existing and
prospective investors that their investments are safe and they are being treated fairly
(Black, Love & Rachinsky 2006). Thus, proponents of these three theories contend that
board independence is positively associated with firm performance.
On the contrary, stewardship theorists argue that having more independent directors
may not improve firm performance (Baysinger & Hookisson 1990; Davis, Schoorman
& Donaldon 1997; Weir & Laing 2000; Bozec 2005). As independent directors do not
work in the firm as full-time employees, they may have limited knowledge of the firm’s
operations. Consequently, they may not be able to deal with complex and yet routine
problems, which may result in lower quality decision-making that gives rise to poorer
firm performance (Weir & Liang 2000; Kiel & Nicholson 2003). In addition, it has been
argued that they may not be as committed as executive directors since their role is part-
time and may hold full-time employment or multiple directorships elsewhere (Bozec
2005; Jiraporn, Singh & Lee 2009). Further, excessive monitoring and supervision by
these independent directors may stifle managerial creativity and initiative in decision-
making (Haniffa & Hudaib 2006).
Consistent with the conflicting nature of the extant literature on board size and CEO
duality, empirical evidence relating to board independence and firm performance has
produced mixed results (e.g. Vance 1978; Baysinger & Butler 1985; Schellenger, Wood
& Tashakori 1989; Mehran 1995; Weir, Laing & McKnight 2002; Ho & Williams 2003;
Gupta & Fields 2009). The difference in results could be due to different sample
periods, sample size variation, different corporate governance characteristics, and
different methodologies employed to measure firm performance. Bathala and Rao
63
(1995) argue that board composition is only one of the many corporate governance
mechanisms employed by firms and it varies in the scope used by different scholars in
examining the relationship between board governance and firm performance. Others
argue that the inclusion of endogeneity of board composition and the simultaneous
equation methods may yield different results (Hermalin & Weisbach 1991; Barnhart &
Rosentein 1998; Bhagat & Black 2002).
On the IPO front, Filatotchev and Bishop (2002) examine the effect of share ownership
of board members on IPO underpricing for a sample of 251 UK IPOs. They conclude
that investors have a strong preference for experienced executive directors who
maintain excellent relationships with institutional investors, and contribute effectively
in corporate governance practices and the IPO process. They find no significant
relationship between underpricing and share ownership of executive directors and non-
executive directors. On the contrary, Howton, Howton and Olson (2001) employ a
similar study in the US and find that there is a significant positive relationship between
share ownership by insiders and underpricing. Their result is not consistent with the
hypothesis that high share ownership of board members lowers the uncertainty of
investors and leads to lower underpricing. They conclude that the underpricing of these
firms is a positive signal to the market on their management quality. Certo, Daily and
Dalton (2001) conducted a similar study in the US using a larger sample of IPOs over a
different time period, lending support to the findings of Howton, Howton and Olson
(2001). The difference in the results reported by Howton, Howton and Olson (2001),
Certo, Daily and Dalton (2001) and Filatotchev and Bishop (2002) may be due to time
period and sample size differences. Specifically, Howton, Howton and Olson (2001)
and Certo, Daily and Dalton (2001) examined 412 and 748 IPOs listed in US during
1986-1994 and 1990-1998, respectively. While Filatotchev and Bishop (2002) reviewed
64
a relatively small sample size of 251 IPOs listed during December 1999 and December
2000 (they did not explain the reason for selecting such a short period). Thus, the latter
results may not be conclusive in view of the unrepresentative small sample size and
short time frame used.
Some studies have found that firms with a higher proportion of non-executive directors
tend to have a higher level of underpricing (Zahra 1996; Howton, Howton and Olson
2001; Certo et al. 2001). This has been attributed to inside directors with expert
knowledge, being a better resource for advice and being a proxy a for firm’s
commitment to innovation and venture activities. On the other hand, there are studies
demonstrating that board independence has no association with initial returns of IPOs
and post-IPO performance. For instance, Mak et al. (2002) using samples of IPO firms
in Singapore listed during 1994-2001 do not find evidence of a relationship between
board independence and IPO underpricing. Similarly, Balatbat, Taylor and Walter
(2004) conclude that outside directors have no effect on post-IPO performance in
Australia. Another Australian study by Lin (2005) also reports similar findings.
2.7.4 Director ownership
Director ownership of shares is another critical component of corporate governance
mechanism that links to financial performance. Essentially, there are two opposing
theoretical propositions that link director equity ownership and financial performance:
convergence-of-interest and entrenchment.
Firms undergoing IPOs experience a significant change in their ownership structure.
According to agency theory, outside directors can help to reduce agency costs and
increase IPO firm value through their ability to monitor and control the non-value
65
maximizing activities of management (Chen & Steiner 1999; Lee et al. 1992; Jain &
Kini 1994; Roosenboom & Goot 2005). Similarly, proponents of signalling theory argue
that firms with a higher proportion of director ownership at the time of listing are more
likely to send a positive signal to prospective investors that there is a better alignment of
interest between directors and shareholders (Kosnik 1987, Certo, Daily & Dalton 2001).
Thus, issuers with a higher level of director ownership are associated with a higher level
of underpricing and long-run performance.
Based on a sample of 748 US IPOs listed between 1990 and 1998, Certo, Daily and
Dalton (2001) report that director ownership is significantly and positively associated
with underpricing. Their findings are also well supported by Lee, Taylor and Walter
(1996) and Howton, Howton and Olson (2001). Specifically, Howton, Howton and
Olson (2001) find that while the results do not support the hypothesis that higher board
ownership firms experience less underpricing in the short-run, they do support the
notion that high board ownership firms outperform in the long-run. Jain and Kini (1994)
argue that positive director ownership and long-run performance of the IPOs are due to
better monitoring by directors with higher equity stakes. In addition, McWilliam and
Sen (1997) find that having insiders on the board who are also shareholders improves
alignment between manager and shareholder interests, resulting in the observed superior
long-run performance for these firms. If board members have a large stake in the firm
and their wealth is affected by poor long-term performance, they are likely to have a
stronger incentive to monitor managerial activity than those board members holding a
lesser stake (Brickley, Lease & Smith 1998).
66
Other studies document no relationship between director ownership and IPO
underpricing (Brennan & Franks 1997; Filatotchev & Bishop 2002; Lin 2005) and long-
run performance (Lin 2005). Lee, Taylor and Walter (1996a) argue that the relationship
between director ownership and level of initial returns is difficult to predict as there is a
high level of uncertainty with respect to the future cash flows of these issuers at the time
of listing. In addition, the mixed results observed in prior studies could be due to the
varying proxies used in various studies of director ownership. For instance, studies by
Certo, Daily and Dalton (2001) and Howton, Howton and Olson (2001) and Lin (2005)
measure the equity ownership of officers and/or directors, while studies by Jain and
Kini (1994), and Lee, Taylor and Walter (1996a) focus on the retention of shares by the
original shareholders. Brennan and Frank (1997) present their analysis using both the
equity ownership of directors before and after listing.
2.7.5 Female directorship
Proponents of agency theory suggest that gender diversity promotes a better
understanding of the marketplace and thus enable firms to penetrate to markets more
easily (Carter, Simskins & Simpson 2003; Campbell & Minguez-Vera 2008). In
addition, Rose (2007) argues that gender diversity provides a wider variety of
perspectives to evaluate business issues. This improves creativity and innovation within
the corporation that leads to more effective decision making. Carter, Simskins and
Simpson (2003) contend that greater gender diversity can increase board independence
as they observe that women are more likely to raise queries that would not be raised by
male directors. However, it may be more time consuming in board meetings and
decision-making if there is a wider dispute and diverse leadership styles among the male
and female directors (Fenwick & Neal 2001; Litz & Folker 2002; Smith, Smith &
Verner 2006).
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The presence of women in the upper echelons of management varies among countries
and most companies still have a higher percentage of male directors. In recent years,
several European countries have introduced mandatory requirements for listed
companies to allocate board seats to women. For instance, Norway requires 40 percent
female representation on corporate boards by the end of 2008, while Spain and France
require 40 percent and 50 percent female directors, respectively, by the end of 2015.
Statistically, the Equal Opportunity for Women in the Workplace Agency (EOWA
2008) highlights that female directorship on major public listed firms in Australia,
France, in Europe, Sweden and Norway is 8.3%, 7.6%, 9.7%, 26.9% and 44.2%
respectively. The high percentage of female directorships in Norway is due to
legislation enacted in 2004, where it states that female board representation in public
listed firms must be at least 40 percent. In addition, the report finds that the percentage
of major listed companies having at least one female director varies considerably among
ASX 200 companies in Australia (49%), FP 500 companies in Canada (52.8%), FTSE
200 companies in the UK (77%) and S&P 500 companies in the US (91%).
Despite gender diversity receiving wide attention and being perceived as an indicator of
good corporate governance, the level of female directorship in Asian companies is far
lower than those reported in the US and in Europe. Specifically, based on a study
conducted by McKinsey (2012), the average representation of women on boards in Asia
is only 8%, which is far lower than those reported in the US (15%) and in Europe
(17%). The Korn/Ferry Institute (2013) conducted a study to examine board diversity in
the top 100 companies in each of the nine countries in Asia Pacific. It concludes that
only Australia has a recorded double-digit percentage of female directorship (16.7%),
and participation by women at board level is relatively low level in China (9%), Hong
Kong (8.2%), India (5.8%), Japan (2%), Malaysia (9.4%), New Zealand (9.1%),
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Singapore (6.8%), and South Korea (2.4%). Similarly, recent studies in Indonesia
(Deleman & Maythil 2012) and Hong Kong (Veron 2013) also report a relatively low
participation rate of 11.6% and 9.4% in Indonesia and Hong Kong, respectively. In
Singapore, the Centre for Governance, Institutions & Organisations (CGIO) from NUS
Business School collects data from 677 SGX listed companies and it reports that only
377 female directors are found in these sample companies, accounting for 7.9% of the
total number of directors (CGIO 2013). In addition, 58.2% of these firms had all-male
directors. Further, the study shows that the percentage of these companies having at
least one female director, two female directors, and three or more female directors are
31.6%, 8.3% and 1.9% respectively.
McKinsey (2012) suggests several factors as contributing to the low representation of
female directors in Asian countries, though the severity of each factor varies among
each country. Firstly, lower female labour participation rates are observed in countries
such as India (35%), Malaysia (47%) and Taiwan (47%) when compared to an average
of about 70% in the US and the UK. Secondly, many firms in Asian economies do not
see gender diversity as a strategic priority and thus remain passive in recruiting more
female directors. Thirdly, many Asian working women have the ‘double burden’ of a
job and looking after their family, and the traditional culture of ‘family is more
important than your career’ still exists in many Asian countries. McKinsey (2012)
reports this perception as widely seen in male-dominated board members in countries
such as Japan and South Korea. The Korn/Ferry Institute (2013) also cites that longer
tenure among board members and no quota imposed by regulatory bodies in most Asian
countries are plausible explanations for the under representation of women directors.
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In the context of IPOs, gender diversity in the top management team provides a strong
non-financial signal to potential investors that the issuers would like to tap into different
management styles, social behaviours, exposure to market environments, diverse
experiences and expertise between male and female directors to improve strategic
decision-making, exploit market opportunity and enhance performance (Benavides-
Velasco, Quintana-García & Guzmán-Parra 2013). Empirical studies on the presence of
women in the upper echelons of management and IPO performances are sparse and
restricted to specific firm characteristics. For instance, Mohan and Chen (2004) examine
the nexus between gender effect and IPO underpricing. Their study focuses only on
male and female CEOs and does not consider the entire management team. Specifically,
using 33 IPOs having a female-led CEO and 757 IPOs having a male CEO, they find no
significance difference in initial returns between the two groups. Krishnan and Parson
(2007) examine the impact of female directorship on the long-run performance of 353
Fortune 500 companies between 1996 and 2000. They contend that firms with a higher
proportion of female directors generate more profits and higher returns after listing,
compared to those with a lower level of female directorship. Welbourne, Cycyota and
Ferrante (2007) study 534 US IPOs floated between 1993 and 1996 and they find
positive association between female directorship and Tobin’s Q, three-year share price
growth and growth in earnings per share. They suggest the positive impact of female
directors on IPO performance could be due to improved innovation and decision-
making processes in a more gender diverse management team, and also a higher
possibility that on average, female directors perform better than their male counterparts.
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2.7.6 Family directorship
Family businesses have been a major driving force behind the economic success around
the world, including Asia, Africa, Latin America, and in the US (La Porta, Lopez-de-
Silanes & Shleifer 1999; Claessens et al. 2002; Morck & Yeung 2003; CGIO 2013).
Wal-Mart, Ford, Samsung, LG, L’Oréal, Heineken, Ikea, and Hutchinson Whampoa are
among the largest family-run firms in the world. In the US, one-third of the S&P 500
companies are owned and managed by families (Anderson & Reeb 2003). Based on a
study conducted by CGIO in 2013, about 61% of the listed firms in Singapore (as at 30
September 2011) are family firms.
Family businesses differ from non-family businesses as the former are controlled or/and
managed by members of the family with the intention of passing on the business across
generations (Chua, Chrisman & Sharma 1999). Prior studies use different measures of
family firms such as family ownership, voting power, managerial involvement, board
control and intention for family succession (Litz 1995; La Porta, Lopez-de-Silanes &
Shleifer 1998; Chua, Chrisman & Sharma 1999; Anderson & Reeb 2003; Gomez-Mejia,
Larraza-Kintana & Makri 2003; Chua, Chrisman & Sharma 2005; BØhren 2011; CGIO
2013). Using the broadest definition, CGIO (2013) defines a family firm as “one in
which (co-)founders or their family members are present among the 20 largest
shareholders or as board members” (CGIO 2013, p. 7). This differs from other studies
where scholars define a family firm as one where family members are involved in
running a business, and they own an equity stake from a mere two percent (Anderson &
Reeb 2003) to a majority stake of more than 50% (BØhren 2011). On the other hand, La
Porta, Lopez-de-Silanes and Shleifer (1998) hold the view that the family firm is one
where the family has an equity stake of 20% or more. Thus, whether the family has
‘control’ over the business may boil down to ownership, management and control over
the business.
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Traditional theories such as agency theory and resource dependence theory dominate
the discussion by academics on the relationship between family business and firm
performance. Agency theorists perceive firms as a nexus of contracts between principals
and agents, and argue that due to the close relationship between family owners and
family managers, agency problems are reduced in family firms and thus result in better
firm performance (Habberson, Williams & MacMillan 2003). However, agency
conflicts may arise between principal-agent (agency problem I) and principal-principal
(agency problem II) (Villalonga & Amit 2006). It is suggested that agency problem I is
much lower in family firms than non-family firms due to the goal alignment between
family owners and managers (Jensen & Meckling 1976), and also through family
owners having stronger incentives to monitor family managers (Pollak 1985). In the
case of agency problem II, it is argued that large family owners may take decisions that
benefit them more than outside minority shareholders (Fama & Jensen 1983; Shleifer &
Vishny 1997; Young et al. 2008).
Proponents of resource dependency theory contend that family businesses tend to be
more cautious in managing and allocating their resources in running their businesses
(Sirmon & Hitt 2003). Studies supporting this theory attempt to identify the
‘uniqueness’ in managing resources and developing capabilities among family
businesses that allow them to gain competitive advantage (Habbershon, Williams &
MacMillan 2003). In addition, scholars find that family businesses possess unique
capabilities that are difficult to duplicate by competitors. These include human capital
(Sirmon & Hitt 2003), financial and physical capital (Dyer 2006), social capital (Arregle
et al. 2007), reputation and trustworthiness (Aronoff & Ward 1995), integrity,
commitment and passion towards the business (Lyman 1991), and entrepreneurship
spirit (Zahra, Hayton & Salvato 2004).
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In line with other board variables discussed earlier, empirical evidence on the family
business-performance relationship are mixed. Some studies report a positive association
between family business and firm performance (e.g. Carney & Gedajlovic 2002; Durand
& Vargas 2003; CGIO 2013; Amran & Ahmad 2011; Wilson, Wright & Scholes 2013),
while other studies find a negative or no significant relationship between the two (e.g.
Barth, Gulbrandsen & Schone 2005; Barontini & Caprio 2006; Westhead & Howorth
2006; Chen, Gray & Nowland 2011). The reasons for these mixed results could be
similar to those discussed earlier for the other board variables: different proxies used to
measure performance, small sample sizes, short observation periods and different
control variables used. In addition, it is believed that the measures of the family firm
differ among scholars due to the varied definition of family control, ownership and
management across studies. For example, in their UK study, Wilson, Wright and
Scholes (2013, p. 7) define a family firm as a firm with “more than 50% of the shares of
the firm, two or more shareholders have the same surname, and at least one family
shareholder is also a director”. However, the study conducted by CGIO (2013) for
Singapore family firms employs a much broader definition where it defines a family
firm as “one in which (co-) founders or their family members are present among the 20
largest shareholders or as board members” (CGIO 2013, p. 7). Other studies mentioned
previously also offer a different definition of a family firm (e.g. La Porta, Lopez-de-
Silanes & Shleifer 1998; Anderson & Reeb 2003). Thus, different measures may yield
different results. Further, the definition of ‘family directors’ also varies among studies.
For example, Chen, Gray and Nowland (2011) include a broad spectrum of family
directorship in their studies, which include family CEO, family member Chairman,
family member directors, and family representative directors/CEO/Chairman. On the
other hand, Barontini and Caprio (2006) focus on family control and include
descendants in their study. Consequently, the inclusion of different levels of family
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directors by different scholars may produce conflicting results. These differences may
also provide different research findings relating to family directorship and IPO
performance presented below.
In addition to agency and resource dependency theories, signalling theory also plays a
critical role in family businesses when they go public (Litz 1995; Chrisman, Chua &
Sharman 1998; Ding & Pukthuanthong-Le 2009, 2012). As mentioned earlier, family
businesses possess many unique characteristics and the family owners may demonstrate
different behaviours when they go for listing (Ram & Holiday 1993; Tsui-Auch & Lee
2003). Specifically, there is a change of share ownership and even management through
the appointment of outside independent directors. Thus, family owners have to provide
strong signals to prospective investors that they will remain committed to the business
even after listing, and this can be achieved by continuing to run the business and
holding a majority equity stake after listing (Downes & Heinkel 1982; Clarkson et al.
1991; How & Low 1994). Therefore, this commitment will reduce any uncertainty
faced by investors and their confidence when investing in these IPOs, which reduces the
underpricing level and enhance long-term performance.
Empirical studies on the relationship between family governance and IPO performance
are relatively limited, especially in Singapore. Based on the best knowledge of the
researcher, the only study that examines the association between family governance and
IPO underpricing in Singapore is by Mak et al. (2002). Specifically, they use 269 IPOs
listed on SGX between 1994 and 2001 to examine the impact of board variables on
initial returns of IPOs, measured by offer premium (offer price divided by net tangible
assets per share) and market premium (first day market price divided by net tangible
assets per share). They report a negative relationship between underpricing and family
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ownership and family management. On the other hand, they find a positive relationship
between family Chairman and initial returns. Further, they do not find evidence to
suggest there is a significant and negative relationship between underpricing and family
CEO and family directors. In Taiwan, Ding and Pukthuanthong-Le (2009) find a
negative relationship between non-family directorship and underpricing, which suggests
that including non-family directors on the board signals to investors that agency
problems can be reduced and thus produces a lower level of underpricing. Ding and
Pukthuanthong-Le (2012) conducted a further study in Taiwan comparing the
performance of 84 family businesses with 84 non-family businesses. They also
conclude that family firms which have outsiders on the board have significantly less
underpricing. In addition, they report that the expected proportion of family ownership
three years after listing is negatively related to underpricing. This finding suggests that
issuers who have high expected family ownership three years after listing signals
original shareholders’ confidence in the firm, which will lower the amount of market
uncertainty and thus underpricing. However, they found no evidence that the existence
of a potential successor would affect IPO underpricing among family firms.
2.8 Corporate Governance Index (CGI)
In a significant departure from the traditional approach in analysing each board variable
separately with firm performance, there is a new line of corporate governance research
that involves the construction of a compliance or composite corporate governance index
to examine the corporate governance performance nexus. Essentially, this index
encapsulates a comprehensive set of corporate governance provisions stipulated in the
code of corporate governance and is mainly applied to measure the level of compliance
among listed firms.
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One of the earliest studies that employed CGI is Gompers, Ishii and Metrick (2003),
where they construct a CGI using data collected from Investor Responsibility Research
Center (IRRC) publications to measure the quality of shareholder rights. They found
that firms that possess stronger shareholder rights reported higher firm value, more
profits and lower capital expenditures. Firms with stronger shareholder rights were
found to generate higher firm value, measured by accounting profits and Tobin’s Q.
Using Gompers et al.’s CGI, Cremers and Nair (2005) find that US firms with better
corporate governance report better stock returns. Further studies in the US by Gillan,
Hartzekk and Starks (2003), Larcker, Richardson and Tuna (2005), Chhaochharia and
Grinstein (2007), Bebchuk, Cohen and Ferrell (2009), and Bruno and Claessens (2010)
also lend support to the results gathered by Gompers et al. (2003) and Cremers and Nair
(2005).
In the UK, Shabbir and Padget (2005) developed a non-compliance CGI based on the
1998 UK Combined Code to examine 122 FTSE 350 firms between 2000 and 2003. In
line with the US studies, a positive relationship exists between corporate governance
compliance and performance, measured by total shareholder return, ROA and ROE. On
the contrary, Arcot and Bruno (2007), based on a larger sample size of 245 UK listed
firms, report that compliance to the 1998 Combined Code may not necessarily lead to
better financial performance, as measured by ROA. Possible reasons for the difference
could be different sample sizes and sample periods, different performance measures
used, and also the number of corporate governance provisions applied. Specifically,
Shabbir and Padget (2005) use 12 provisions while Arcot and Bruno (2007) apply only
eight provisions.
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Klapper and Love (2004) apply a different methodology in constructing the CGI in
measuring a sample of 374 firms in 14 countries: the Credit Lyonnaise Securities Asia
(CLSA) governance index (CLSA 2002). They conclude that firms with higher scores
report a higher return on assets and larger firm value in the stock market. Further studies
applying the CLSA index include Mitton (2004), Durnev and Kim (2005), and Chen,
Chen and Wei (2009). It must be noted that these studies have two limitations. Firstly,
the CLSA index consists of analysts’ subjective judgements and thus may create bias in
the analysis. Secondly, these studies fail to discuss the importance of industry
differences on corporate governance practices.
Other studies have employed the corporate governance scorecard as a comprehensive
measure to examine the relationship between corporate governance practices and firm
performance in the US (Aggarwal et al. 2007; Brown & Caylor 2009) and other
countries such as China (Bai et al. 2004; Li 2005), Germany (Drobetz et al. (2003),
Hong Kong (Lei & Song 2004; Cheung et al. 2007), Kenya (Baroko, Hancock and Izan
2006), Korea (Black, Jang & Kim 2006), Russia (Black 2001), South Africa (Ntim
2009), Taiwan (Chen et al. 2007), and Zimbabwe (Owusu-Ansah 1998; Mangena and
Tauringana 2007). The divergence of findings in these studies may be attributable to
sample selection bias, variation in corporate governance structures and systems across
different countries and different proxies being employed to measure corporate
governance. The studies are limited by small sample sizes (Owusu-Ansah 1998; Black
2001), selection bias in the data (Black, Jang & Kim 2006) and limited aspects of
corporate governance (Chen et al. 2007). None of these studies apply the CGI to
examine the relationship between corporate governance and IPO performance.
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In Singapore, the Business Times launched the Corporate Transparency Index (CTI) in
2000 to assess the transparency of listed companies in Singapore. The CTI was
published every quarter in the Business Times. From 2009, the CTI was replaced by the
Governance and Transparency Index (GTI), which was developed by the Corporate
Governance and Financial Reporting Centre and the Business Times. The GTI score
assesses companies on their corporate governance disclosure and practices in relation to
the Singapore Code of Corporate Governance, as well as financial transparency and
investor relations. It only focuses on listed companies on the SGX and does not cater for
companies with secondary listings, trusts and funds and IPOs. To date, no study has
been conducted using the CTI or GTI to measure IPO performances in Singapore.
In sum, from the above literature review, it is evident that previous studies only apply
the CGI to listed firms and different proxies have been used to measure corporate
governance. Thus, the results could be country specific and may not necessarily apply
to all countries. In addition, no study has been conducted using CGI to measure IPO
performance in Singapore. This provides the opportunity to explore the relationship
between corporate governance in Singapore through the use of CGI and IPO
performance.
2.9 Summary
This chapter reviews many studies conducted on underpricing and the long-run
performance of IPOs in different countries employing different methodologies. The
results gathered were mixed and many studies were conducted using data from the US
and other developed countries in Europe, and the results obtained may not necessarily
extend to other markets. Some of the theories that may explain the existence of IPO
underpricing include winner’s curse, underwriter reputation, signalling, the partial
78
adjustment, lawsuit avoidance hypothesis, price stabilization, informational cascades,
hot and cold markets anomaly, and prospect theory. The main explanations for mixed
long-term performance include heterogeneous expectations, fads, windows of
opportunity, and management issues and problems.
Two possible remedies for the presence of asymmetric information between issuers,
underwriters and investors, involvement of venture capitalists and the existence of lock-
up periods in IPOs were reviewed in this chapter. In addition, the role of corporate
governance on IPO performance is also presented, focusing on the key variables of
corporate governance such as board size, board independence, CEO duality, ownership
structure, gender diversity, and family directorship. Several studies have employed the
Corporate Governance Index to provide a more comprehensive assessment of the
impact of corporate governance and firm performance. The interaction between
corporate governance and IPO performance is a relatively new research area in
Singapore. There have been limited studies on underpricing and long-run performance
of IPOs in Singapore, and none of these studies has examined the interaction of
corporate governance and IPO performance on companies listed on the Main Board and
those listed on SESDAQ. This study aims to fill some gaps in the literature by exploring
the possible interaction. The next chapter will present the Code of Corporate
Governance in Singapore.
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Chapter 3
Code of Corporate Governance in Singapore
3.1 Introduction
This chapter presents an overview of the Singapore Code of Corporate Governance (the
‘Code’). Section 3.2 discusses the main provisions of the Code and its implementation,
and section 3.3 presents a chapter summary.
3.2 Code of Corporate Governance in Singapore
3.2.1 Background
The Code was first published in 1998 and was adopted from the UK Combined Code of
1998. The Singapore Exchange (SGX) incorporated the Code as part of its listing rule
which all listed companies must comply with, effective from 1 January 2003, and any
deviations from the Code must be explained. The Code was well received both
domestically and globally, and has resulted in significant improvements in the corporate
governance practices and disclosures of SGX-listed companies (Mak 2007).
Through new laws, listing rules and best practice guidelines, the Code reflects the wave
of corporate governance reforms that followed several scandals around the world. In the
US, the Sarbanes-Oxley Act was enacted in 2002, alongside other recent changes in
regulations by the Securities and Exchange Commission (SEC) and amendments in the
New York Stock Exchange’s (NYSE) listing rules. In the UK, a revised Combined
Code, based on recommendations in the Higgs Report, was adopted in 2003 (Higgs
2003). The Combined Code was revised again in 2006. In Australia, the Australian
Stock Exchange (ASX) Corporate Governance Council published its Principles of Good
Corporate Governance and Best Practice Recommendations in March 2003, and more
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recently, the Australian Government amended the Corporations Act through the
Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure)
Act 2004 (CLERP 9), which introduced significant changes in the areas of corporate
disclosure and auditing. The Stock Exchange of Hong Kong (SEHK) released a Draft
Code on Corporate Governance Practices and Corporate Governance Report in January
2004 and made a number of corporate governance-related changes in its listing rules in
March 2004.
In light of all the changes made by these countries, the Council on Corporate Disclosure
and Governance (CCDG) in Singapore revised the Code in 2005, with more detailed
disclosures and stringent requirements imposed on all listed companies on SGX. The
revised Code applies to all listed companies in SGX from 1 January 2007. The four
main provisions spelt out in the revised Code are: board matters, remuneration,
accountability and audit, and communication with shareholders.
3.2.2 Board matters
Unlike the 2001 Code, which did not spell out the specific responsibilities of the Board,
the revised Code explicitly states that the Board’s role is to:
(a) provide entrepreneurial leadership, set strategic aims, and ensure that the
necessary financial and human resources are in place for the company to meet its
objectives;
(b) establish a framework of prudent and effective controls which enables risk to be
assessed and managed;
(c) review management performance; and
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(d) set the company’s values and standards, and ensure that obligations to
shareholders and others are understood and met.7
The revised Code emphasises a higher degree of independence of the board by
recommending that independent directors should comprise at least one-third of the
Board. This extends requirements under the original SGX listing rules which required
at least two independent directors. An independent director is one who has no
relationship with the company, its related companies (subsidiaries, fellow subsidiaries
or parent company) or its officers that could interfere, or be reasonably perceived to
interfere, with the exercise of the director’s independent business judgement with a
view to the best interests of the company (Code of Corporate Governance 2005).
Examples of such relationships, which would deem a director not to be independent,
include:
(a) a director being employed by the company or any of its related companies for
the current or any of the past three financial years;
(b) a director who has an immediate family member8 who is, or has been in any of
the past three financial years, employed by the company or any of its related
companies as a senior executive officer whose remuneration is determined by
the remuneration committee;
(c) a director, or an immediate family member, accepting any compensation from
the company or any of its subsidiaries other than compensation for board service
for the current or immediate past financial year; or
7 Code of Corporate Governance (2005), para 1.1 8 The Listing Manual of the Singapore Exchange clarified that close family members include a spouse,
child, adopted child, stepchild, brother, sister and parent.
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(d) a director, or an immediate family member, being a substantial shareholder of or
a partner in (with 5% or more stake), or an executive officer of, or a director of
any for-profit business organisation to which the company or any of its
subsidiaries made, or from which the company or any of its subsidiaries
received, significant payments in the current or immediate past financial year.
As a guide, payments aggregated over any financial year in excess of S$200,000
should generally be deemed significant.9
The revised Code recommends that the role and duties of Chairman of the Board and
CEO of the company should, in principle, be separated. In addition, the relationship
between the Chairman and CEO where they are related to each other (spouse, child,
adopted child, stepchild, brother, sister or parent) should be disclosed. In the event that
the Chairman and CEO are the same person, or in cases where the Chairman and the
CEO are related to each other, or the Chairman and the CEO are part of the executive
management team, the revised Code recommends companies to appoint an independent
non-executive director to be the lead independent director. If appointed, the lead
independent director should be available to shareholders to address any concerns raised
by them that the Chairman or CEO has failed to resolve.
The revised Code recommends that companies establish a Nominating Committee,
which comprises a minimum of three directors with the majority, including the
Chairman, to be independent. The main responsibilities of the Nominating Committee
are to recommend to the Board the appointment of directors, annual assessment of
directors’ independence, deciding whether or not a director has sufficient time to
discharge his or her responsibilities in cases of multiple directorships, evaluation of the
9 Code of Corporate Governance (2005), para 2.1
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Board’s performance, assessing individual director’s contribution, and to establish
performance measures.
The revised Code is silent on the number of other directorships in which a director may
be involved. It states that companies should disclose directorships or chairmanships in
other listed companies presently held and those held over the last three years, together
with other major appointments. In addition, key information regarding directors’
academic and professional qualifications, equity stake in the company and its
subsidiaries, membership of committees (as a member or Chairman), date of first
appointment and date of last re-election as a director should be reported in the annual
report. Further, the company’s annual corporate governance report should highlight
which directors are executive, non-executive or independent.
3.2.3 Board and CEO remuneration
The main responsibilities of the Remuneration Committee (RC) are to make
recommendations to the Board relating to remuneration policies for all directors and
executives, and determining each director’s remuneration package. The revised Code
states that the RC should consists solely of non-executive directors, the majority of
whom, including the Chairman, are independent. It maintains that the executive
directors’ remuneration should take consideration of the company’s relative
performance as well as each director’s performance, and clearly state the specific
measures that can be used in assessing executive directors’ performance. The
remuneration of non-executive directors should take into account the directors’ duties
and level of contribution to the company in terms of effort and time spent.
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The revised Code recommends that the Board should disclose, as a minimum, the
remuneration in bands of S$250,000 of the top five highest-ranking key executives of
the company. Within each band, there should be separate disclosures (in percentage
terms) of each director’s remuneration, including base/fixed salary, variable or
performance-related bonuses, benefits in kind, share options granted and other long-
term benefits. In addition, it is within companies’ prerogative to disclose in full their
individual directors’ remuneration and that of employees who are immediate family
members of a director or the CEO and whose remuneration is more than S$150,000.
3.2.4 Board accountability
The revised Code states that management reports to the Board while the Board is
accountable to shareholders. It recommends that the Board should furnish shareholders,
on a monthly basis, an objective assessment of the company’s financial results and
prospects. The Audit Committee should comprise at least three non-executive directors,
the majority of whom, including the Chairman, should be independent. The revised
Code also indicates that at least two directors should possess accounting or financial
management expertise or experience. The Code does not give specific guidelines as to
what constitutes such expertise and experience, preferring instead to let the Board
exercise its judgement to decide. The duties of the Audit Committee should include:
(a) reviewing the scope and results of the audit and its cost effectiveness, and the
independence and objectivity of external auditors. Where the auditors also
supply a substantial volume of non-audit services to the company, the Audit
Committee should keep the nature and extent of such services under review,
seeking to balance the maintenance of objectivity and value for money;
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(b) reviewing the significant financial reporting issues and judgements so as to
ensure the integrity of the financial statements of the company and any formal
announcements relating to the company’s financial performance;
(c) reviewing the adequacy of the company’s internal controls
(d) reviewing the effectiveness of the company’s internal audit function; and
(e) making recommendations to the Board on the appointment, reappointment and
removal of the external auditor, and approving the remuneration and terms of
engagement of the external auditor.10
The revised Code recommends that companies should establish an independent internal
audit function, which can be internally formed or outsourced. The internal auditor
should be primarily accountable to the Chairman of the Audit Committee but have a
secondary administrative reporting relationship to the CEO. The Audit Committee
should make certain that the internal auditor should comply with the standards laid
down by nationally or internationally recognised professional bodies such as the
Standards for the Professional Practice of Internal Auditing set by The Institute of
Internal Auditors.
3.2.5 Communication with shareholders
The revised Code contains two principles pertaining to communication with
shareholders: general disclosure of information to shareholders and communication
through the AGM. Companies should hold frequent, valuable and open communication
with shareholders, which should be as descriptive, detailed and as forthcoming as
possible. Inadvertent disclosures to a selected group should be addressed by making
similar disclosures openly to others as soon as possible via a website. Companies should
10 Code of Corporate Governance (2005), para 11.4
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encourage shareholders to participate effectively during the AGM and also consider
alternative means for facilitating voting by shareholders. Separate resolutions for each
distinct issue are recommended, and chairmen of the three major board committees,
together with the external auditors should be present to help address any queries by
shareholders.
3.3 Summary
The Code of Corporate Governance in Singapore was adopted from the UK Combined
Code of 1998. In 2005, the Code was revised with more detailed disclosures and
stringent requirements. The revised Code applies to all listed companies in SGX from 1
January 2007. The four main provisions spelt out in the revised Code are: board
matters, board and CEO remuneration, board accountability, and communication with
shareholders. The next chapter outlines the hypotheses tested in this thesis.
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Chapter 4
Hypotheses Development
4.1 Introduction
The main hypotheses tested in this thesis are IPO firms that (i) are backed by venture
capitalists, (ii) have longer lock-up periods, and (iii) have better corporate governance
practices reporting lower underpricing and better long-run performance. The main
testable hypotheses are derived from the ex ante uncertainty and signalling hypotheses.
This chapter is organised as follows. Section 4.2 develops hypotheses about
underpricing and long-run performance for IPOs listed on the Main Board of SGX vis-
à-vis those listed on the SESDAQ. Section 4.3 presents the hypotheses relating to
corporate governance. Section 4.4 develops the hypotheses relating to VC-backed IPOs,
and section 4.5 presents the hypotheses relating to lock-up period. Section 4.6 discusses
the hypotheses pertaining to specific governance variables. Section 4.6 summarises the
chapter by relating the hypotheses to the research questions raised in Chapter 1.
4.2 Main Board-listed IPOs vs. SESDAQ-listed IPOs
The Singapore Exchange (SGX) has two trading platforms: the Main Board and the
SESDAQ. To prevent any listing of speculative or extremely risky firms, the SGX
imposes relatively stringent criteria for listing firms and requirements for the Main
Board are tighter than those for the SESDAQ. IPO firms seeking listing on the Main
Board must have (i) an operating history of more than five years; (ii) a cumulative pre-
tax profit of at least $7.5 million over the last three consecutive years; (iii) a pre-tax
profit of at least $1 million in each of those three years; or cumulative pre-tax profit of
at least $10 million for the latest one or two years; or a market capitalisation of at least
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$80 million at the time of the initial public offering, based on the issue price. On the
contrary, IPO firms seeking listing on the SESDAQ need not comply with any
minimum profit or market capitalisation requirements. However, the management must
be able to show how the proceeds raised from going public will generate positive
growth in the long-term (Chong & Ho 2007). Generally, a SESDAQ IPO is smaller in
terms of total assets, has a shorter operating history and the amount of finance raised is
lower.
In terms of the minimum public float, a SESDAQ listing firm is required to issue at
least 15% of the total shares floated or 500,000 shares, whichever is greater. These
shares must be held by at least 500 shareholders. For a listing on the Main Board, the
minimum public float adopts a scale that enables larger firms to have smaller minimum
public floats. A quarter of the issued shares by a Main Board firm must be in the hands
of at least 1,000 shareholders if the projected market capitalisation of the IPO firm is
less than S$300 million. For IPO firms with a market capitalisation of more than S$300
million, shareholding spread varies between 12% and 20 percent.11 A SESDAQ listed
IPO may be upgraded to the Main Board after two years if it meets the requirements for
listing.
Generally, IPOs listed on the SESDAQ are perceived as riskier and have lower quality
market attributes in terms of liquidity, profitability and trading volume compared to
their counterparts listed on Main Board (Hameed & Lim 1998; How et al. 2007). Main
Board companies are required to provide more detailed disclosures of their financial
performances and operating history and, consequently, prospective investors have
11 20 percent for projected market capitalisation of more than S$300 million but up to S$400 million; 15 percent for projected market capitalization of more than S$400 million but up to S$1 billion and 12 percent for projected market capitalisation exceeding S$1 billion.
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access to more and better quality information to value the company. Through this, Main
Board listed companies provide a stronger signal of firm quality and lower ex ante
uncertainty relative to Second Board listed firms.
Hameed and Lim (1998) examine the degree of underpricing experienced by IPOs listed
on the Singaporean Main Board and SESDAQ during 1993-1995. They find that there
was a significant and higher underpricing in the fixed price offer for SESDAQ-listed
IPOs. However, they find no significant difference for tender plus fixed price offer. This
could be explained by the fact that IPO firms underprice the fixed tranche, but are able
to ‘recover’ the loss through a higher exercise price for their tender tranche. This
finding is consistent with signalling theory proposed by Allen and Faulhaber (1989) and
Welch (1989). However, Hameed and Lim’s (1998) study is based on a very limited
number of IPOs (30 listed on the Main Board and 23 listed on the SESDAQ) and only
over two years. In addition, the study examines the impact of different pricing
mechanisms on IPO underpricing, which is no longer popular among recent IPOs.
Further, the study does not consider other variables and fails to discuss the long-run
performance of IPOs.
Yong and Isa (2003) examine the differences in mean initial returns for Malaysian IPOs
listed between 1990-1998 on the Main Board and the Second Board of the Kuala
Lumpur Stock Exchange. They find that Second Board listed IPOs reported a higher
mean initial return than those listed on the Main Board. Based on the size effect
argument, they concluded that IPOs listed on the Second Board face higher risks than
their counterparts listed in the Main Board as they are relatively smaller in size.
Consequently, investors demand a higher return for investing in the Second Board to
compensate them for taking a higher risk. Zuluki, Campbell and Goodacre (2007) apply
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both the event-time approach and calendar-time approach to examine 454 Malaysian
IPOs listed on both the Main Board and Second Board between 1990 and 2000. They
report no significant difference between the long-run performance of the Main Board
and Second Board IPOs.
Venkatesh and Neupane (2005) examine the differences in underpricing between 58
IPOs and 16 IPOs listed on the Main Board and Second Board of Thailand Stock
Exchange, respectively, between 2000 and 2004. They find that the Main Board-listed
IPOs reported a higher degree of underpricing compared to their counterparts listed on
the Second Board, which is contrary to the findings of Yong and Isa (2003), Zuluki et
al. (2007), and Hameed and Lim (1998). The results obtained by Venkatesh and
Neupane (2005) may not be conclusive as their study is based on a relatively small
sample of IPOs listed on the Second Board. In addition, their study focuses on
ownership concentration, which is not examined in the other studies.
This study will further test the signaling and the ex ante uncertainty hypotheses whereby
companies underprice their shares at IPO to signal their quality to the market. This
study posits that:
H1a: IPO underpricing is higher for Main Board-listed IPOs than SESDAQ-listed
IPOs.
H1b: Long-run performance is higher for Main Board-listed IPOs than SESDAQ-
listed IPOs.
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4.3 Corporate governance and firm performance
A potential signal of the firm’s quality is its corporate governance structure, which
means management plays a critical role in ensuring that appropriate corporate
governance structure is in place. In recent years, increased emphasis has been placed on
corporate governance compliance with the construction of a compliance or composite
Corporate Governance Index (CGI). The CGI encapsulates a comprehensive set of
corporate governance provisions to examine the quality of corporate governance in
listed firms. This approach is widely used in addition to examining specific governance
variables (Ntim 2009). Based on the signalling argument and reducing ex ante
uncertainty, IPOs firms having a higher level of corporate governance compliance may
send positive signals to the market, also helping to reduce agency problems.
Consequently, these IPOs report a lower level of underpricing and better long-run
performance.
Several studies have employed the CGI as a comprehensive measure of corporate
governance to examine the relationship between corporate governance practices and
firm performance in the US (Gompers, Ishii & Metrick 2003; Aggarwal et al. 2007;
Bebchuk, Cohen & Ferrell 2009; Brown & Caylor 2009) and other developed countries
such as China (Bai et al. 2004; Li 2005), Germany (Drobetz, Schillhofer & Zimmerman
2003), Hong Kong (Lei & Song 2004; Cheung, Connelly & Limpaphayom 2007),
Korea (Black, Jang & Kim 2006), Russia (Black 2001), Taiwan (Chen et al. 2007) and
the UK (Luo 2006). The divergence of findings in these studies may be attributable to
sample selection, corporate governance structures and systems that vary across different
countries, and different proxies being employed to measure corporate governance. None
of these studies applies the CGI to examine the relationship between corporate
governance and IPO performance, indicating a need for research that specifically
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focuses on this type of firm. The present study undertakes this task in the context of
Singapore IPOs. Based on the results of the previous studies that have found a positive
correlation between corporate governance rating and non-IPO firm performance, it is
posited that:
H2a: IPO underpricing is lower for IPOs with higher CGI rating.
H2b: Long run performance is higher for IPOs with higher CGI rating.
4.4 Venture Capitalist-backed (VC-backed) IPOs vs. non VC-backed IPOs
One important signal of IPO quality involves a third party certification such as the
involvement of VCs. Generally, VCs are not involved in the operational running of
businesses; instead, they play a governance role by monitoring the managers of the
businesses (Gorman & Sahlman 1989; Kaplan & Stromberg 2003). By providing
certification, VCs can credibly signal IPO quality and reduce information asymmetry
and uncertainty.
VCs typically retain their equity stake in portfolio firms after the IPO and one of the key
measures used to ascertain their return on investments is share price performance. In
order to preserve their investment value, VCs have incentives to ensure that proper
corporate governance structure is developed at the time of the IPO and they are also
involved in strategic decisions in these firms (Filatotchev 2006; Hochberg 2006). VCs
are known to require more independent directors, fewer insider directors, and a
separation of the role of the CEO and chairman (Baker & Gompers 2003; Hochberg
2006).
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Empirical studies on the role of VCs in an IPO have focused mainly on the
certification/monitoring model, and the results gathered are mixed and largely
dependent on the sample period examined and methodologies adopted (Gompers &
Lerner 1997). For instance, Megginson and Weiss (1991) find that VC-backed firms
were able to attract higher quality underwriters and more favourable auditors’ reports,
enabling an issuing firm to reduce its costs of going public through lower underpricing
and lower underwriter compensation. Wang, Wang and Lu (2003) adopt a similar
approach to the study conducted by Megginson and Weiss (1991) to examine the effects
of venture capital firms on VC-backed listed companies in Singapore and contrary to
the findings of Megginson and Weiss (1991), they conclude that underwriters were
unwilling to reduce their charges based on VC certification.
In terms of the impact of VC on IPO firms’ long-run performance, results from past
studies are also mixed. For instance, Brav and Gompers (1997) find that VC-backed
IPOs outperformed non VC-backed IPOs in the post-IPO period. On the other hand,
Hamao, Packer and Ritter (2000) find that apart from those IPO firms that were backed
by independent or foreign-owned VCs, there is no significant difference in long-run
performance of VC-backed IPOs compared to non VC-backed IPOs in Japan.
Interestingly, they find that IPOs backed by the lead VC, who also played the role of the
lead underwriters, reported more superior initial day returns than other mainstream VC-
backed IPOs. Their findings suggest that conflicts of interest can influence the initial
pricing, but not the long-run performance of IPOs in Japan. Da Silva Rosa, Velayuthen
and Walter (2003) examine the certification/monitoring model in Australia and find that
even though both VC-backed IPOs and non VC-backed IPOs exhibit underpricing, the
difference is not significant and both sets earn average returns in the two years after
going public. Their findings do not lend support to the certification/monitoring model.
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As noted in Chapter 2, Jain and Kini (1995) report worse operating performance of VC-
backed companies in the IPO year compared with non VC-backed IPOs, since VC
certification reduces the need to impress public investors through enhanced performance.
In addition, they find that VC-backed companies perform better in the post-IPO period,
although the difference declines gradually as the firms age. The degree of superior
performance is positively associated with VC reputation.
Due to the private and sensitive nature of the venture capital industry, very few studies
have been able to assess the performance of VCs in Singapore. Although there are a few
qualitative studies conducted using case studies and surveys on the venture capital
industry in Singapore (Scheela 1994; Gibbon et al. 1998; Tan 1998; Bruton, Ahlstrom
& Singh 2002), the data sources are relatively limited and the results largely depend on
the extent of the information disclosed by the VCs. The information gathered could
potentially be biased as the respond rate of the survey was low and the respondents may
only provide positive information to boost their reputation and image (Koh & Koh
2002; Wang, Wang & Lu 2003).
The only study that identifies the role of VCs and their impact on Singapore IPO firm
performance was conducted by Wang, Wang and Lu (2003) for IPOs listed on SGX
between 1987 and 2001. The Singapore VC market has grown significantly since then,
indicating a need to assess the extent to which VCs add value to IPO firms. Due to the
inconclusive results from prior studies, further investigation is required on the role of
VCs on IPO performance.
To avoid the problems of obtaining selective and positively biased information from
VCs, this study gathers publicly available information from IPO prospectuses that state
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the involvement of VCs. It is hoped that the results from this study will enable
regulators and major players in the venture capital industry in Singapore to gain a better
understanding of the importance of VCs in the IPO market. Thus, this study expects that
VC-backed IPOs provide a positive signal on their quality and also lower ex ante
uncertainty, and thus are associated with lower underpricing and better long-run
performance.
H3a: VC-backed IPOs have lower underpricing than non VC-backed IPOs.
H3b: VC-backed IPOs have higher long-run performance than non VC-backed IPOs.
4.5 Lock-up period
Leland and Pyle (1977) develop a model whereby the proportion of equity retained by
insiders at the time of IPO shows a sign of commitment to the quality of their
companies. Courteau (1995) extends the model propounded by Leyland and Pyle
(1977) to voluntary lock-ups. She argues that highly valued firms signal their quality by
agreeing to a longer lock-up period as this imposes a cost to insiders who are holding
undiversified portfolios. In addition, a lock-up period serves as a signal to investors that
key players such as directors will remain with the firm for at least the lock-up period
and will not dispose of their shareholdings in anticipation of imminent bad news (Field
& Hanka 2001). Further, a longer lock-up period may lower uncertainty as shareholders
of IPO firms have committed themselves not to dispose a portion or all of their
shareholdings for a specific period after the IPO. When the lock-up period expires,
shareholders who are bound by the lock-up agreements are likely to sell their holdings
to realise their capital gains or to seek risk diversification (Espenlaub, Goergen &
Khurshed 2001).
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The impact of a lock-up period in IPO underpricing has gained academic attention in
recent years, with studies conducted in the US (Mohan & Chen 2001; Keasler 2001;
Aggarwal, Krigman & Womack, 2002; Brav & Gompers 2003; Arthurs et al. 2006),
Germany (Bessler & Kurth 2004), the UK (Espenlaub, Goergen & Khurshed 2001;
Espenlaub et al. 2003; Goergen, Renneboog & Khurshed 2006) and Malaysia (Wan-
Hussin 2005). These studies report that the shorter the lock-up period, the higher the
degree of underpricing. IPO firms that were backed by VCs or reputable underwriters
were more likely to be associated with shorter lock-ups, which suggests that VCs prefer
to exit the firm at the earliest opportunity (Goergen, Renneboog & Khurshed 2006).
Chong and Ho’s (2007) study of the association of lock-up period and the accuracy of
the earnings forecast disclosure appears to be the only study that deals with lock-up
periods for Singapore IPOs. They conclude that the lock-up length is positively
associated with the accuracy of a voluntary earnings forecast disclosure. However, it
does not examine the relationship between lock-up length and IPO underpricing and
long run performance. Based on the results reported in prior studies, it is hypothesised
that:
H4a: The longer the lock-up period, the lower the IPO underpricing.
H4b: The longer the lock-up period, the higher the long run performance.
It must be noted that not all the IPOs in Singapore have staged lock-ups. The study will
only focus on the first lock-up period, which is consistent with a study conducted by
Chong and Ho (2007).
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4.6 Board structure
According to signalling theory, an effective signal must be observable, known in
advance and costly to imitate (Spence 1973). In the context of an IPO, one important
measure of the IPO quality is the quality of the firm’s management and its board
(Lawless, Ferris & Bacon 1998; Yatim 2011), both contributing to its governance
structure. The market sees sound corporate governance structure as a signal of firm
quality, which can help reduce the level of ex ante uncertainty prior to listing (Certo,
Daily & Dalton 2001). High quality IPOs may employ good corporate governance
mechanisms to communicate their superior quality to prospective investors. In this
study, five specific board variables and their relationship with issuers’ initial returns and
long-run performance were examined: board size, CEO duality, board independence,
female directorship and family directorship.
4.6.1 Board size
Board size is widely considered to be one of the most important board structure
variables. The extant literature and empirical evidence presented in Chapter 2
demonstrate that the size of the board can affect corporate performance (Yermack 1996;
Mak & Yuanto 2005; Haniffa & Hudaib 2006).
Resource dependency theorists argue that as IPO firms are generally less established,
they may require larger boards to establish networks and linkages to access external
resources that are critical for the firm to grow and improve performance (Pfeffer &
Salancik 1978; Finkle 1998). This will help to reduce ex ante uncertainty and lead to a
lower level of underpricing and better long-run performance.
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Thus, it is predicted that:
H5a: IPO underpricing is lower for IPOs with larger board size at the time of listing.
H5b: Long-run performance is higher for IPOs with larger board size at the time of
listing.
4.6.2 CEO duality
The impact of CEO duality on firm performance has been debated extensively. Based
on stewardship and resource dependence theories, proponents of CEO duality maintain
that the duality provides the precise direction of a single leader and a swift response to
decision- making and external events, which may yield more superior financial
performance (Anderson & Anthony 1986; Donaldson & Davis 1991; Daily & Dalton
1997; Haniffa & Hadaib 2006). In addition, the single CEO-Chairman possesses
greater knowledge of the firm and its industry, and is more committed to perform
compared to an external chair (Vance 1978; Cochran, Wood & Jones 1985; Alexander,
Fennell & Halpern 1993; Weir, Laing & McKnight 2002). Further, proponents argue
that CEO duality provides clearer managerial accountability for good or poor
performance (Bozec 2005) and reduces additional remuneration and compensation
(Vafeas & Theodorou 1998).
Thus, it is predicted that:
H6a: IPO underpricing is lower for IPOs having Chairman and CEO positions held by
different individuals at the time of listing.
H6b: Long-run performance is higher for IPOs having Chairman and CEO positions
held by different individuals at the time of listing.
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4.6.3 Board independence
The degree of board independence is of paramount importance when addressing any
inefficiencies that arise from the separation of ownership and control, and is thus widely
perceived as one of the key drivers of ‘good’ corporate governance (Fama & Jensen
1983; Filatotchev et al. 2007). From the agency theory viewpoint, independent directors
are appointed by shareholders so they can exercise their independent judgment to board
decisions on behalf of shareholders (Cadbury Report 1992; Chhaochharia & Grinstein
2009).
It has also been argued that having independent directors on the board helps to reduce
informational asymmetry by signalling management intent to treat existing shareholders
and prospective investors fairly (Black, Jang & Kim 2006). An IPO with a higher
proportion of independent directors may signal that effective control systems are in
place (Fama & Jensen 1983). As their reputation is at stake, outside directors will
hesitate to join boards of lower quality as this may damage their reputation (Certo,
Daily & Dalton 2001). High quality IPOs are likely to attract more outside directors,
thus leading to a lower level of underpricing and better long-run performance.
H7a: IPO underpricing is lower for IPOs that have a higher percentage of independent
directors on the board at the time of listing.
H7a: Long-run performance is higher for IPOs that have a higher percentage of
independent directors on the board at the time of listing.
4.6.4 Female directorship
The presence of women on the board has been associated with many financial and
business outcomes (Schwartz 1980; Morrison 1992; Fernandez 1993). A gender diverse
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board may provide more creativity and different perspectives in relation to problem-
solving, innovation, market access, image improvement, and public and investor
relations (Wiersema & Bantel 1992; Smith, Smith & Verner 2006; Welbourne, Cycyota
& Ferrante 2007). Thus, firms that have a higher proportion of female directors are
more likely to report better financial performance (Blackburn, Doran & Shrader 1994;
Cordeiro & Stites-Doe 1997; Kevin & Antonio 2008; Carter et al. 2010), more effective
decision making (Carter, Williams & Reynolds 1997), and higher firm value and market
performance (Wright et al. 1995; Carter, Simkins & Simpson 2003; Frink et al. 2003;
Bonn 2004; Catalyst 2004; Adams & Ferreira 2009).
On the IPO front, based on signalling theory, it is argued that having a gender diverse
board prior to going public suggests that issuers like to reduce uncertainty by
establishing legitimacy and social acceptance (D’Aveni 1990; Higgins & Gulati 2003).
Researchers have suggested that firms that engage female directors increase their level
of capital raised (Mak & Roush 2000; Dimovski & Brooks 2006) and are positively
associated with initial returns and long-run performance (Welbourne, Cycyota &
Ferrante 2007).
Thus, it is predicted that:
H8a: IPO underpricing is lower for IPOs having higher proportion of female directors
on the board at the time of listing.
H8a: Long-run performance is higher for IPOs having higher proportion of female
directors on the board at the time of listing.
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4.6.5 Family directorship
Previous research has examined the effects of family involvement on firm performance
(Claessens et al. 2002; Anderson & Reeb 2003; Maury 2006; Chen, Gray & Nowland
2011). However, few studies have focused on family involvement and IPO
performance. Due to the coupling of ownership and management, positive and effective
signalling are particularly critical for family business listings as family firms
demonstrate unique behaviour with respect to family members’ involvement in strategic
decisions, succession planning and value creation (Litz 1995; Chrisman, Chua &
Sharma 1998; Zahra, Hayton & Salvato 2004). In addition, due to potential agency
problems between family owners (insiders) and non-family shareholders (outsiders),
family owners may comply with the code of corporate governance by appointing
independent directors at the time of listing to reduce uncertainty and provide a positive
signal to the market (Anderson & Reeb 2004; Ding & Pukthuanthong-Le 2009). Having
external independent directors on the board may also signal to the market that these
outsiders may contribute their wealth of experience and relevant expertise to
complement the family directors (Filatotchev & Bishop 2002; Higgins & Gulati 2006).
Further, in line with Leland and Pyle’s (1977) signalling theory, family owners may
commit to retain their shareholding after listing to signal to the market their confidence
in the firm, which may lead to a lower level of underpricing.
In respect of long-run performance, there is a tendency for family firms to continue
improving their performance over time, especially those belonging to the first
generation where the founders are the directors. This is to ensure that they can pass on
their business to their heirs. Thus, they are less willing to increase the firm’s short-term
performance at the expense of long-term success (Bertrand & Schoar 2006; Ding &
Pukthuanthong-Le 2009). The long-term orientation of the family firm will be more
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visibly seen when it is controlled and managed by family members. Though non-family
managers and directors may pursue short-term managerial opportunism that may be
detrimental to the firm’s long-run performance, this could be minimized due to the
family members having control over the firm. Riding on their familiarity of the family
business and the motivation to preserve the family’s long-term wealth, the family
directors can closely monitor the actions of the non-family managers to minimise any
dysfunctional behaviour (Block & Thams 2007; Ding & Pukthuanthong-Le 2009).
Based on the above arguments, this study predicts that issuers with a higher proportion
of family directors will report a lower level of underpricing and better long-run
performance.
H9a: IPO underpricing is lower for IPOs having a higher proportion of family
directors on the board at the time of listing.
H9b: Long-run performance is higher for IPOs having a higher proportion of family
directors on the board at the time of listing.
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4.7 Summary
In this chapter, the hypotheses to be tested were developed. As discussed in Chapter 1,
this thesis addresses the following research questions:
1. What are the views of CEOs/CFOs, investment bankers/underwriters, and
institutional and retail investors in relation to the factors that are used to
construct the CGI, changes in board structures, involvement of VC, the impact
of lock-up periods, and other corporate governance practices on the underpricing
and long-run performances of IPOs in Singapore?
2. Do IPO firms listed on the Main Board report a different level of underpricing
and long-run performance than IPO firms listed on the SESDAQ?
3. To what extent do the corporate governance disclosures of IPO firms listed on
the Main Board and the SESDAQ conform to the Code?
4. Do VC-backed IPOs have a different level of underpricing and long-run
performance than non VC-backed IPOs?
5. Do IPOs with a longer lock-up period have a different level of underpricing and
long-run performance than IPOs with a shorter lock-up period?
6. To what extent do board variables explain the underpricing and long-run
performance of IPO firms?
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Essentially, hypotheses 1, 2, 3 and 4 address the second, third, fourth and fifth research
question, respectively. Hypotheses 5-9 address the last research question.
In the next chapter, the variables employed and the data used to test the hypotheses will
be discussed. In addition, it also documents the qualitative research process and presents
the descriptive statistics of the sample IPOs.
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Chapter 5
Research Methodology and Design
5.1 Introduction
This chapter describes the research methodology employed to examine the short- and
long-term performances of IPOs to test the hypotheses developed in Chapter 4. The
qualitative research design and sample profile for the quantitative analysis are presented
in sections 5.2 and 5.3, respectively. Sections 5.4, 5.5 and 5.6 describe the dependent,
independent and control variables used in the quantitative analysis. Section 5.7 presents
the general model employed in the quantitative phase and section 5.8 provides a
summary of this chapter.
5.2 Qualitative Research Phase
The qualitative phase of the study relates to seeking the views of CEOs/CFOs
(‘Issuers’), bankers and underwriters (‘Underwriters’), and retail and institutional
investors (‘Investors’) on the factors that contribute to a strong corporate governance
culture. In addition, it also seeks to ascertain whether, in their view, changes in board
structures, the involvement of VCs in an IPO, the presence of a lock-up period, and
other corporate governance practices have an impact on the performance of IPOs. To
address this, 30 face-to-face semi-structured interviews were conducted with 10
representatives from each of the three classifications: Issuers, Underwriters and
Investors. In-depth face-to-face interviews were preferred for two main reasons. Firstly,
when the Issuers and Underwriters were contacted to seek their participation in this
study, they expressed a preference for face-to-face interviews rather than completing
questionnaires as they prefer not to be bound by the specific areas spelt out in a
questionnaire. Secondly, as this is a new area of study in Singapore, direct
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communication with Issuers, Underwriters and Investors had the potential to provide a
richer understanding of the practical aspects of corporate governance practices and their
impact on underpricing and the long-run performance of IPOs. Interview guides (see
Appendix 1) facilitated the interview process and ensured all major topics of interest
were covered with each interviewee.
Interviewees were asked about their perceptions of the relative importance of the
various factors that influence the strengths of the company’s corporate governance
structure. These views were incorporated in the construction of the Corporate
Governance Index (CGI) used in the quantitative phase of this study. Each interviewee
was provided with a list of 60 preliminary items listed in the CGI two weeks prior to the
interview, so they had time to review the list and share their considered views during
the interviews.
Most of the interviewees were recruited via recommendations from the researcher’s
personal contacts, and eight interviewees were referred by other interviewees. The
interviews were conducted between 5 June and 9 September 2008. To encourage
comfortable participation and open sharing of views, the interviewees could select the
interview location. Twenty-five interviews were held at the interviewees’ offices and
the rest of the interviews were conducted either at quiet coffee lounges located on the
ground floor of the interviewees’ offices or in meeting rooms at the researcher’s work
premises. It should be noted that the opinions expressed by the sample of 10
interviewwes selected from each group may not be representative of the general
perceptions of the other issuers, underwriters and investors.
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The interviews varied in length from 45 minutes to one hour and 48 minutes. The
average interview times for the Issuers, Underwriters and Investors were 77 minutes, 63
minutes and 61 minutes, respectively. Generally, the length of the interview varied with
the interviewee’s years of work experience, although the willingness to share
information with the researcher and the degree of knowledge of the research topic also
appeared to play an important role. The longer length of the Issuer interviews was
largely because they spent more time discussing the importance of corporate
governance and its impact on a successful IPO.
Due to the exploratory nature of this study and the practical difficulties in obtaining
interviewees, there was no attempt to gather equal representation in age group and
gender across the three categories. Males constituted the majority of the sample (80%).
The Issuers group had eight male interviewees and two female interviewees, reflecting
the fact that corporate boardrooms are still dominated by men (Burke & Mattis 2000;
Sheridan 2001; Rhode 2003; Sheridan & Milgate 2005). Similarly, all interviewees in
the Underwriter group were males, reflecting the dominance of males in the banking
industry (Metz & Tharenou 2001). Two female underwriters were initially shortlisted,
but due to work commitments, they were ultimately unavailable to participate in the
study. For the Investors group, six out of ten interviewees are male investors.
The profiles of the interviewees are summarised in Tables 5.1A (Issuers), 5.1B
(Underwriters) and 5.1C (Investors). The average number of years of work experience
for the Issuers was 21 years and all the Issuers interviewed had been working in their
respective industry for more than 10 years. By comparison, the average service length
of the CEOs and CFOs was eight years. As the IPOs examined were listed between
2000 and 2007, all the issuers interviewed had their firms listed during the study period.
108
This ensured that their views reflect their understanding of the corporate governance
practices prevailing during the study period.
Among the 10 Underwriters interviewed, eight were actively involved in the
underwriting process and six of the eight had underwritten 23 of the 401 IPOs included
in the sample. All the underwriters were thoroughly conversant with the framework of
the Code of Corporate Governance in Singapore and had the relevant expertise and
experience to provide practical insights into corporate governance practices in
Singapore IPOs.
The backgrounds of the interviewees from the Investors group were diverse. They
ranged from a CEO of a small private enterprise to someone who had been retired for
more than five years. The average length of work experience was 21 years. Most had
actively invested in shares, government bonds, properties and/or gold for more than
eight years. Three of the 10 interviewees were institutional investors, all of whom were
females.
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Table 5.1A: Profile of interviewees – Issuers
No.
Interview
(minutes)
Designation
Gender
Experience
(years)
Main Board /
SESDAQ
A1
75
Chief Finance Officer
Male
27
Main Board
A2
63
Group Financial Controller
Male
22
SESDAQ
A3
108
Chief Executive Officer
Male
23
Main Board
A4
49
Vice President - Finance
Female
11
Main Board
A5
88
Group Financial Controller
Male
17
Main Board
A6
90
Chief Executive Officer
Male
20
SESDAQ
A7
67
Group Financial Controller
Male
18
Main Board
A8
83
Chief Finance Officer
Male
29
SESDAQ
A9
95
Chief Executive Officer
Male
31
Main Board
A10
51
Vice President - Finance
Female
16
SESDAQ
Table 5.1B: Profile of interviewees – Underwriters
No.
Interview
(minutes)
Designation
Gender
Experience
(years)
Organisation
B1
65 Vice President
Male
25
Listed company
B2
58
Assistant Vice President
Male
21
MNC
B3
73
Executive Director
Male
35
Listed company
B4
63
Vice President
Male
23
MNC
B5
58
Senior Manager
Male
20
Listed company
B6
70
Executive Director
Male
30
MNC
B7
74
Assistant Vice President
Male
17
MNC
B8
50
Vice President
Male
19
MNC
B9
67
Senior Vice President
Male
27
MNC
B10
47
Assistant Vice President
Male
13
MNC
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Table 5.1C: Profile of interviewees – Investors
No.
Interview
(minutes)
Designation
Gender
Experience
(years)
Industry
C1
80 Lecturer
Male
23
Education
C2
58
Senior Sales Manager
Female
25
Retail
C3
63
Partner
Male
18
Auditing
C4
45
Retiree
Male
43
-
C5
53
Senior Engineer
Male
15
Oil & Gas
C6
66
Financial Analyst
Female
12
Food & Beverage
C7
64
Vice President
Female
17
Banking
C8
71
Chief Executive Officer
Male
26
Manufacturing
C9
50
Vice President
Female
10
Banking
C10
56
Purchasing Manager
Male
15
Restaurants
All interviews were audio recorded and transcribed. In order to protect the identity of
the interviewees, their names and any other identifying information were removed from
the interview transcripts (as per UWA University Ethics Committee requirements).
The transcripts were imported into NVivo 8 and coded by line-unit. Coded text was
assigned to tree nodes that formed a hierarchy of categories and subcategories of
concepts. Each node was related to each of the CGI factors as well as other variables
such as ‘VC-backed’ and ‘lock-up period’. The transcripts were reviewed many times in
their entirety and also by examining data contained in individual nodes and at node
intersections to facilitate interpretation of the findings.
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5.3 Quantitative Research Phase
The quantitative research phase of the proposed study addresses all the research
questions raised in Chapter 1. Firstly, the study estimates the level of underpricing and
long-run performance of IPO firms listed on Main Board and SESDAQ. Secondly, it
examines the extent of conformance of the corporate governance disclosures, as proxied
by the Corporate Governance Index (CGI) at the time of listing, of IPO firms listed on
Main Board and SESDAQ. Thirdly, it examines whether the level of underpricing and
long-run performance differs when the IPOs are backed by a venture capitalist.
Fourthly, it determines the extent to which the level of underpricing and the long-run
performance of IPOs are affected by the varied lock-up period. Finally, it examines the
association of specific board variables such as board size, CEO duality, board
independence, gender diversity, family directorship, and IPO performance.
The Code of Corporate Governance (the ‘Code’) was first issued by the Corporate
Governance Committee on 21 March 2001. Compliance with the Code is not
mandatory, but listed companies are required under the SGX Listing Rules to disclose
their corporate governance practices and to provide explanations for any deviation from
the Code in their annual reports released at their Annual General Meetings (‘AGMs’)
held from 1 January 2003 onwards. In order to obtain a reasonable sample size and to
examine the effect of pre and post-implementation of the Code on the level of
disclosure, this study uses a sample that includes all IPOs listed on the Main Board and
SESDAQ of SGX from 2000 to 2007. Consequently, for IPOs that list from 2003, any
change in corporate governance structures and disclosures subsequent to the IPO could
be identified. IPOs launched after 2007 have been excluded as the study assesses their
long-run performance, and therefore requires at least three years of data after the IPO.
112
Based on the information available on the SGX website and an annual listing available
at the SGX library, a total of 503 firms lodged prospectuses with the SGX between
2000 and 2007. These included secondary listings and offers by foreign companies. A
detailed screening was undertaken to ensure that only unseasoned issues of pure
ordinary shares raised were included in the final sample.
The selected sample does not include real estate investment trust (REIT) and investment
funds as they have different financial reporting formats. In addition, these funds act
more as conduits for investment into other entities and their IPOs are generally not
underpriced (Ritter & Welch 2002). As noted previously, the sample excludes all
secondary offerings.
Table 5.2: Sample selection criteria
Year lodged prospectuses 2000 2001 2002 2003 2004 2005 2006 2007 00 - 07
Total no. of firms lodged prospectuses with
SGX 82 37 33 58 81 70 63 79 503
Less: Secondary listing 1 1 1 1 1 1 2 1 9
Less: Seasoned issues 6 2 0 0 0 0 0 6 14
Less: REITs, Investment funds 0 1 3 1 1 4 12 18 40
Less: Prospectuses not available 3 1 1 2 1 2 1 0 11
Less: Trading price not available 4 0 2 5 3 2 2 2 20
Less: Delisted IPOs where trading is less than 4 0 0 0 7 4 1 2 18
three years from listing
Final Sample Size 64 32 26 49 68 57 45 50 391
A further check on the Yahoo Finance and Bloomberg websites found that the first day
trading prices for 20 IPO firms were not available. Further, another 11 IPO prospectuses
were not available from the SGX website. Thus, these firms were also excluded from
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the sample. In order to access the long-term performance of the IPOs, companies that
were delisted within three financial years were excluded, which resulted in the same
number of IPOs being studied for both underpricing and long-term performance. The
final sample consisted of 391 IPO firms that lodged prospectuses between January 2000
and December 2007. Table 5.2 presents the selection criteria that were applied to obtain
the final sample.
Table 5.3 and 5.4 present the number of IPOs on the Main Board and SESDAQ by year
and industry, respectively. There was some degree of clustering in 2000 and 2004: the
number of IPOs in these two years accounted for about 34% of the entire sample. Table
5.4 also shows some clustering in the distribution by industry. Manufacturing firms
accounted for about 48% of the entire sample.
114
Table 5.3: Sample distribution by year
Year Main Board SESDAQ Total
2000 2001 2002 2003 2004 2005 2006 2007
Total
No.
47 14 18 27 43 39 35 43
266
%
17.7 5.3 6.8 10.2 16.2 14.7 13.2 16.2
100.0
No.
17 18 12 24 28 18 10 7
125
%
13.6 14.4 6.4 17.6 20.0 14.4 8.0 5.6
100.0
No.
64 32 26 49 68 57 45 50
391
%
16.4 8.2 6.6 12.5 17.4 14.6 11.5 12.8 100.0
Table 5.4: Sample distribution by industry
Industry Main Board SESDAQ Total
Commerce Construction Finance Hotels/Restaurants Manufacturing Multi-industry Properties Services Transport/Storage/Communication Others Total
No.
37 5 4 1
145 0 8 51 12 3
266
%
13.9 1.9 1.5
0.4 54.5 0.0 3.1 19.2 4.5 1.1 100.0
No.
27 6 0 5 41 1 2 38 4 1
125
%
21.6 4.8 0.0 4.0 32.8 0.8 1.6 30.4 3.2 0.8
100.0
No.
64 11 4 6
186 1 10 89 16 4 391
%
16.4 2.8 1.0 1.5 47.6 0.3 2.6 22.8 4.1 1.0 100.0
5.3.1 Survivorship of sample firms
A survivorship bias may arise if the delisted IPOs are excluded from the sample, for
instance in the examination of post-IPO long-run performance and corporate
governance practices. IPO firms that survived are likely to show better performance
and stronger corporate governance practices (Lin 2005). To investigate this possibility,
delisting IPO data were purchased from SGX to ascertain the number of IPOs that
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subsequently delisted. As at 31 December 2010, 22 out of the total 391 sample IPO
firms were delisted. This is about 5.6% of the sample, which should not have
significantly affected the results. In addition, eight of these 22 firms were delisted three
years after initial listing. The inclusion of these IPOs will not have any impact on the
analysis of the three-year long-run performance post IPO. The other 14 delisted IPOs
with less than three years of trading history have been excluded from the sample.
5.4 Dependent variables
5.4.1 Measures for underpricing
The following market-based performance measures were used to capture IPO
underpricing:
(1) Raw initial return (RIR)
The raw initial return (RIR) is defined as the IPO offer price from the closing price at
the end of the first day of trading, as a percentage of the initial offer price:
RIRi,t = 0
01
,
,,
i
ii
P
PP −
where
RIRi,t = Raw initial return of company i at the end of the
day of initial listing
Pi,1 = Closing price of company i at the end of the first
trading day
Pi,0 = IPO offer price as per prospectus of company i
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(2) Market adjusted initial return (MAIR)
In order to adjust for market price movements between the date of IPO prospectus and
the end of the first trading day, the market adjusted initial return (MAIR) was calculated
by subtracting the market return measured to SGX Straits Times Index (STI) from the
RIR as follows:
MAIR’i,t = 0
01
,
,,
i
ii
P
PP − -
0
01
,
,,
i
ii
M
MM −
where
MAIR’i,t = Market adjusted initial return of company i
at the end of the day of initial listing
Mi,1 = SGX STI on the first trading day of
company i
Mi,0 = SGX STI at the prospectus date of
company i
5.4.2 Measures for long-run performance
The following aftermarket performance measures were used to capture IPO
underpricing:
(1) Buy-and-hold abnormal returns (BHARs)
The buy-and-hold abnormal returns (BHARs) is one of the most commonly used
performance measures for long-run returns (Barber & Lyon 1997; Kothari & Warner
1997; Loughran & Ritter 1995; Lyon, Barber & Tsai 1999; Wu & Kwok 2007). The
buy-and-hold abnormal return (BHAR) for firm i is ascertained as follows:
BHARi,t = ∏=
+T
t
tiR1
)1( , - ∏=
+T
t
tmR1
)1( ,
117
where T is 36 months after the month in which the IPO is completed, Ri,t is the monthly
raw return on firm i in event month t, and Rm,t represents the monthly return of the
market index (STI). If an issuing firm is delisted prior to the anniversary date of the
holding period, its BHAR will be truncated on that date. To control for the survival bias,
only firms going public between 2000 and 2004 that have remained listed on SGX were
included in the control portfolio.
An equal-weighted returns method was used in this study as it is more robust than a
value-weighted benchmark in revealing abnormal performance (Brown & Warner
1980). Thus, the mean buy-and-hold return (MBHAR) using the equal-weighted returns
was calculated as:
MBHARt = ∑=
n
t
TiBHARn 1
,1
where n is simply the number of stocks in the sample.
(2) Cumulative abnormal returns (CARs)
In order to eliminate the compounding effect of a single period’s abnormal performance
and rebalancing bias calculated by BHAR, cumulative abnormal returns (CARs) was
used for measuring long-run returns as it is a more robust methodology. The monthly
raw return on firm i in event month t is calculated as follows:
Ri,t = (Pi,t – Pi,t-1) / Pi,t-1
where
Ri,t = raw return for firm i in the event month t
following listing;
118
Pi,t = the last traded total return index of firm i in
event month t;
Pi,t-1 = the last traded total return index of firm i in
event month t-1.
The monthly benchmark-adjusted return for firm i in event month t was computed by
subtracting the monthly benchmark return from the monthly raw return.
ARi,t = Ri,t - Rm,t
where
ARi,t = the market-adjusted return for firm i in the
event month t;
Ri,t = raw return for firm i in the event month t
following listing;
Rm,t = the return on market index (SGX STI) in
event month t-1
The mean benchmark-adjusted return on a sample of n stocks for event month t is the
equally-weighted arithmetic mean of the benchmark-adjusted returns, which is defined
as follows:
ARi,t =1
nARi,t
i=1
n
∑
Loughran and Ritter (2000, p. 363) argued that “if one is trying to measure the abnormal
returns on the average companies undergoing some event, then each company should be
weighted equally…[this] will produce point estimates that are relevant from the point of
119
view of a manager, investor, or researcher attempting to predict the abnormal returns
associated with a random event”. Thus, this study employs only the equally-weighted
portfolio return.
The CAR for firm i from event month t is calculated by the summation of the mean
benchmark-adjusted returns across all stocks over the 36-month aftermarket period (T)
as follows:
CARi,t = ti
T
Tt
AR ,
1
∑=
To be consistent with BHARs and the arguments detailed by Loughran and Ritter
(2000), only the equally-weighted averages were used and the holding horizon began
with the first calendar month (T1) after the month in which an IPO was completed. If the
IPO firm is delisted prior to the anniversary date of the holding period, its CAR will be
truncated on that date.
(3) Wealth relative (WR)
According to Ritter (1991), wealth relatives are defined as the ratio of the average return
from holding a portfolio of securities for a certain period to the average return from
holding a portfolio of matching companies or market benchmarks over the same period.
The three-year buy-and-hold returns computed were converted into wealth relatives to
provide an overall indicator of long-run performance relative performance as follows:
WRt =
1
n1+ Ri,t( )
t =1
T
∏
i=1
n
∑
1
n1+ Rm,t( )
t =1
T
∏
i=1
n
∑
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A wealth relative of greater (less) than 1.00 implies that IPOs have outperformed
(underperformed) a portfolio of matching companies or market benchmark.
5.5 Independent variables
5.5.1 Corporate Governance Index (CGI)
The centrepiece of this study was the use of the CGI computed from a scorecard
developed for all listed companies in Singapore by Mak (2007) (refer to Appendix 2).
Essentially, the CGI applied only to listed IPOs between January 2000 and December
2007, with IPOs rated on the basis of the 60 items in the scorecard. Each item was
coded as either one (yes) or zero (no) and the overall CGI was the equally weighted
score of all the 55 items. Based on the principles spelt out in the Code, nine sub-indices
were computed by using the equally-weighted average score of all criteria contained in
each sub-section. For items not applicable to the IPO, a ‘-’ is assigned and restates the
score relative to the maximum possible score for relevant items, such that the scoring is
based on relevant items only. All indexes including the overall CGI and the nine sub-
indices were transformed so that the scores range from 0 to 100. A total corporate
governance rating, to give an ordinal ranking across companies, was calculated for each
company. This index ranges from 0 to 100,12 with a higher score suggesting better
quality in corporate governance practices.
12 The use of weighting schemes varies among literature. For example, Mitton (2004) assigned a composite score to each of the seven areas and used a weightage of 15 per cent for six areas and 10 percent for the seventh. On the contrary, Gompers, Ishii and Metrick (2003), and Brown and Caylor (2006) used equal weights for the factors without transforming the scores. The CGI is derived based on the sum of the scores.
121
5.5.2 Venture capitalist backed
It has been documented that VC-backed IPOs typically have larger boards with a higher
number of non-executive directors and the CEOs have a smaller fraction of share
ownership (Skekhar & Stapledon 2007). In addition, VCs exert more influence on
corporate governance as the IPO represents a significant change in a firm’s ownership
and governance structure, thus, VCs have incentives to ensure that optimal governance
structure systems are in place at the time of IPO to ensure the preservation of the value
of their investment (Hochberg 2006; Kaplan & Stromberg 2003). The analysis included
a dummy variable that takes a value of one if the IPO firm is VC backed, and zero
otherwise.
5.5.3 Lock-up period
The lock-up period is computed by the number of months after the listing date during
which the pre-IPO shareholders undertake not to sell any shares without the approval of
the underwriters (Espenlaub et al. 2003). In some IPOs, there is a staged lock-up. For
instance, a second lock-up period may be imposed on shareholders after the expiry of
the first lock-up period. These shareholders are allowed to sell a portion of their shares
as long as their aggregate shareholdings do not fall below 50% of the company’s issued
share capital. Consistent with the study conducted by Chong and Ho (2007), this study
only focuses on the first lock-up period.
5.5.4 Board variables
As discussed in Chapter 4, in addition to using an overall CGI to measuring the quality
of corporate governance, this study examined specific board variables and their
relationship with the issuer’s initial returns and long-run performance. In line with prior
studies, board variables such as board size (Daily & Dalton 1993; Lin 2005; Yatim
122
2011), CEO duality (Jensen 1993; Mak & Li 2001), board independence (Fama &
Jensen 1983; Certo, Daily & Dalton 2001; Filatotchev & Bishop 2002), female
directorship (Carter, Simkins & Simpson 2003; Campbell & Vera 2008; Adams &
Ferreira 2009), and family directorship (Mak et al. 2002; Ding & Pukthuanthong-Le
2009) were included.
Essentially, board size was measured by the total number of board members at the time
of listing (Lin 2005; Mnif 2010; Chancharat, Krishnamurti & Tian 2012). CEO duality
was a dummy variable, taking the value of one if the Chairman and CEO positions are
held by different individuals and zero otherwise (Rechner & Dalton 1991; Kiel &
Nicholson 2003). Board independence was measured by the proportion of independent
directors on the board at the time of listing (Certo, Daily & Dalton 2001; Filatotchev &
Bishop 2002). Female directorship was measured by the proportion of female directors
to the total number of directors on the board (Boon 2004; Pei 2012). Family directorship
was measured by the proportion of family directors to the total number of directors
(Mak et al. 2002; Ding 2009).
5.6 Control variables
5.6.1 Firm age
Firms that have been in operation for a longer period are more likely to have a better
understanding and history of how the market environment might impact the business,
and have comparatively better control over operations to ensure a longer period of
survival (Firth & Smith 1992; Lee et. al. 1993; Mak 1994; Jain & Kini 1999). Thus, the
degree of ex ante uncertainty faced by potential investors at the time of listing may be
lower, causing underpricing to be lower and long-run performance to be higher
(Megginson & Weiss 1991; Mikkelson, Partcha & Shah 1997; Ritter 1998). The
123
operating history or the age of the company was measured by the number of years since
incorporation before going public, calculated as the listing year minus the year of
incorporation.
5.6.2 Firm size
Company size has been recognised as an important explanatory variables for IPO return.
It has been argued that larger IPO firms enjoy superior long-run performance compared
to smaller IPO firms. These larger firms have greater control over market position and
might enjoy comparative advantages, such as economies of scale, making them less
susceptible to economic fluctuations (Ritter 1991; Firth & Smith 1992; Firth et al.
1995).
Different researchers have used various measures as proxies for the size of the
company. For instance, Firth and Smith (1992) and Chen and Firth (1999) use total
assets as a proxy for size. Chan et al. (1996) and Hovey et al. (2003) use sales turnover,
while Mak (1994) and Chong and Ho (2007) use total shareholders’ equity immediately
after the issue of the shares. Firth et al. (1995), on the other hand, use proceeds from the
new issue. Jelic, Saadouni and Briston (1998) use a combination of total assets after the
new issue, end of year market value after the new issue, and average turnover achieved
during a three-year period prior to the listing, as proxies for size. In a more recent study,
Keasey and McGuiness (2008) use market value of equity as a proxy for firm size,
where they define the market value of equity of an IPO firm as the total number of
shares outstanding disclosed in the IPO prospectus (including the total number shares
offered) multiplied by the offer price. In the present study, the natural log of total assets
prior to listing was the proxy for firm size.
124
5.6.3 Offer size
Lee et al. (1993) maintain that firms with a larger share issue tend to gain greater
publicity and attention compared to those with a smaller equity issue. Thus, the
management may face greater pressure in ensuring that the firm outperforms its
competitors in the short- and long-term. Ritter (1991) reports that firms with a small
offer size tend to show poor performance in the long-term compared to those with larger
offers. In contrast, Allen and Patrick (1996) report a negative relationship between issue
size and aftermarket performance. These mixed results provide motivation for further
investigation of the relationship between IPO returns and offer size. For the present
study, the offer size was measured as the natural log of the total proceeds raised in the
IPO (the offer price multiplied the number of shares offered in the prospectus).
5.6.4 Time gap
The time gap in this study was defined as the number of days between the date of the
prospectus and first trading day. Empirical evidence has suggested that due to the
existence of asymmetric information among issuers, a longer time gap will increase the
risk to investors and thus a higher level of underpricing is observed (How, Izan &
Monrow 1995; Chowdhry & Sherman 1996; Lee et al. 1996a; Mok & Hui 1998; Chan,
Wei & Wang 2004).
5.6.5 Industry
Industrial classification may have an association with the performance of IPOs as each
industry has its unique operating characteristics and different business cycles (Allen &
Patrick 1996; Levis 1993; Ritter 1991). For instance, Ritter (1991) finds that oil and gas
firms reported the worst long-run performance as the oil price declined significantly
during 1981-1983 and most of these firms went public in 1980 and 1981. Similar results
125
were also reported by Levis (1993) and Allen and Patrick (1996) in their studies in the
UK and Australia, respectively. In the US, Thomas (2000) reports that financial
institutions tend to show superior long-run performance compared to other IPOs.
However, it is difficult to conclude that certain industries will always outperform others
as industry performance is highly influenced by national and global economic factors.
In addition, the conclusion gathered from other studies may not apply to the Singapore
economy.
For the purposes of this study, the underpricing and long-run performance of IPO firms
from the manufacturing, services, construction, properties, hotels/restaurants, and
finance sectors were compared with IPO firms from other industries. The justification
for selecting these sectors is that economic statistics generally show that companies in
these sectors in Singapore are subject to more fluctuations from economic swings
compared to companies from other sectors (Year Book of Statistics Singapore 2007). A
dummy variable was introduced into the study, taking a value of one if the company
falls under any of the industries specified above, while companies from other industries
are assigned a value of zero.
5.6.6. Disclosure of earnings forecast
Voluntary disclosure of management earnings forecasts by issuers of IPOs to reduce
asymmetric information and ex ante uncertainty is a well-documented anomaly
associated with IPO underpricing (Healy & Palepu 1993; Keasey & McGuiness 1991;
Merton 1987; Myers & Majluf 1984; Schrand & Verrecchia 2002). Henry, Ahmad and
Riddell (2002) and Jelic (2008) find that firms choosing to provide forecasts leave ‘less
money on the table’ with a lower degree of underpricing. In addition, empirical
evidence suggests that there is a strong relationship between earnings forecasts’ bias and
126
long-run performance (How & Yeo 2001; Jelic, Saadouni & Briston 2001; Jog &
McConomy 2003). For this study, a dummy variable of one is given to IPOs including
an earnings forecast in the IPO prospectus, and zero otherwise.
5.6.7 Retained equity ownership by original owner
Under the signalling hypothesis, insiders of high quality IPOs may choose to retain
ownership as the private information will be fully reflected in the aftermarket share
price, and they can recover their losses associated with underpricing at a later stage.
This signal is credible since the insiders have retained a significant level of interest in
the firm: they are willing to do so only if they are confident of the firm’s future cash
flows. Thus, a higher level of retained ownership should be associated with lower ex
ante uncertainty as insiders signal the value of the firm (Leland & Pyle 1977; Downes &
Heinkel 1982; Keloharju & Kulp 1996).
Empirical studies have shown that a higher retained ownership by original owners is
more likely to be associated with higher performance because it shows a positive signal
to investors, thereby increasing their willingness to pay a higher premium (Jain & Kini
1994; Jelic, Saadouni & Briston 2001; Gurunlu 2008; Boudriga et al. 2009). For this
study, retained equity ownership by the original owners was measured by the
percentage of total outstanding shares directly or indirectly owned by the original
owners at the time of listing.
5.6.8 Underwriters’ reputation
Reputable underwriters are found to be associated with lower underpricing as they may
be able to reduce information asymmetries by certifying a higher firm value to
uninformed investors when compared to their less reputable counterparts (Beatty &
127
Ritter 1986; Booth & Smith 1986; Titman & Trueman 1986; Carter & Manaster 1990;
Higgins & Gulati 1999; How, Izan & Monroe 1995; Li & Masulis 2004). Previous
research has found that IPOs managed by highly reputable underwriters tend to report
lower initial returns and less negative long-run returns than those handled by
underwriters with lower reputations (Carter, Williams & Reynolds 1997; Chemmanur &
Fulghieri 1994; Fields 1995; Michaely & Shaw 1994; Paudyal, Saadouni & Briston
1998; Thomas 2000). On the contrary, there are also evidences that report no
significant relationship between underwriters’ reputation and the IPO underpricing and
long-run performance (e.g. Beckman et al. 2001; Jelic, Saadouni & Briston 2001; Logue
et al. 2002).
Due to the inconclusive results from prior studies, there is a need for further
investigation of the relationship between underwriters’ reputation and IPO underpricing.
Based on the reputation metric propounded by How and Howe (1999), the underwriters’
market share will be used as a proxy, which is defined as the dollar value of all shares
underwritten by an underwriter as a percentage of the total dollar value of all IPOs in
the sample.
In Singapore, the largest underwriters of IPOs during 2000 and 2007 were the four local
banks: DBS Bank, United Overseas Bank, OCBC Bank and Overseas Union Bank.13 A
dummy variable of one is assigned if the firm’s underwriter is one of these four banks,
and zero otherwise.
13 Overseas Union Bank was merged with the United Overseas Bank on 2 January 2002.
128
5.7 General Model
In order to address the research questions and to test the hypotheses discussed in
Chapter 1 and 4, respectively, the approach taken by Certo, Daily and Dalton (2001),
Filatotchev and Bishop (2002), and Lin (2005) is used. Essentially, hierarchical multiple
regression analysis will be employed to investigate the relative importance of corporate
governance in predicting IPO returns and to model the relationship between IPO returns
and several board and control variables.
5.7.1 Underpricing
To test hypotheses 1a, 2a, 3a and 4a discussed in Chapter 4, hierarchical multiple
regression analyses were employed with the variables summarised in Table 5.5. Model
1 included only the control variables while Model 2 introduced the four test variables.
Model 3 included an additional variable, retained equity squared, to test the possibility
of a curvilinear relationship between insider trading and initial returns. Due to the
possible multicollinearity between the control variables, additional robustness tests were
employed. Essentially, Model 4 excluded the firm age variable, Model 5 excluded the
firm size variable, and Model 6 excluded the earnings forecast variable.
UPRICEit = β0 + β1 CGIit + β2 VCBACKit + β3 LOCK-UPit +β4 LISTINGit +
β5 AGEit + β6 LnFSIZEit + β7 LnOSIZEit + β8 TGAPit +
β9 INDUSTRYit + β10 EFORECASTit + β11 REQUITYit +
β12 UNDERWRITERit + εit
To test hypotheses 5a, 6a, 7a, 8a and 9a discussed in Chapter 4, an alternative regression
model was employed with the inclusion of additional test variables such as board size
(5a), CEO duality (6a), board independence (7a), female directorship (8a), and family
directorship (9a).
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Table 5.5 Relationship between the independent variables and underpricing
Dependent variable: Underpricing
Model 1
Model 2
Model 3
Model 4
Model 5
Model 6
Test variables: Board listing Corporate Governance Index Venture capitalist backed Lock-up period
Control variables: Firm age Firm size Offer size Time gap Industry Disclosure of earnings forecast Retained equity Retained equity squared Underwriter’s reputation
√ √ √ √ √ √ √ √
√ √ √ √ √ √ √ √ √ √ √ √
√ √ √ √ √ √ √ √ √ √ √ √ √
√ √ √ √ √ √ √ √ √ √ √
√ √ √ √ √ √ √ √ √ √ √
√ √ √ √ √ √ √ √ √ √ √
5.7.2 Long-run performance
For long-run performance, the regression models covering two years and three years
after listing were employed. These models were similar to the models used for
underpricing, except that underpricing (UPrice) was an independent variable in the
model. In order to capture the possible non-linearity relationship between IPO
underpricing and long-run performance, an additional variable, underpricing squared,
was included. Further, additional robustness tests similar to those covered for
underpricing were conducted under the hierarchical multiple regression analysis where
variables such as firm age, firm size, and earnings forecast were excluded one at a time
due to the possibility of multicollinearity between these variables. The variables used
are summarised in Table 5.6.
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LRRETURNit = β0 + β1 CGIit + β2 VCBACKit + β3 LOCK-UPit +β4 UPRICEit +
β5 AGEit + β6 LnFSIZEit + β7 LnOSIZEit + β8 TGAPit +
β9 INDUSTRYit + β10 EFORECASTit + β11 REQUITYit +
β12 UNDERWRITERit + εit
Table 5.6 Relationship between the independent variables and long-run performance
Dependent variable: Underpricing
Model 1
Model 2
Model 3
Model 4
Model 5
Model 6
Test variables: Board listing Corporate Governance Index Venture capitalist backed Lock-up period
Control variables: Underpricing Underpricing squared Firm age Firm size Offer size Time gap Industry Disclosure of earnings forecast Retained equity Underwriter’s reputation
√ √ √ √ √ √ √ √ √
√ √ √ √ √ √ √ √ √ √ √ √ √
√ √ √ √ √ √ √ √ √ √ √ √ √ √
√ √ √ √ √ √ √ √ √ √ √ √ √
√ √ √ √ √ √ √ √ √ √ √ √ √
√ √ √ √ √ √ √ √ √ √ √ √ √
In line with the approach adopted in testing the relationship between the specific board
variables and underpricing, alternative models were also introduced to examine the
relationship between board size (5b), CEO duality (6b), board independence (7b),
female directorship (8b) and family directorship (9b) with long-run performance.
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5.8 Summary
This chapter described the proposed research methodology and design used in this
thesis. It discussed both the qualitative and quantitative sample and data sources
employed, the variables used and the regression models applied. In the next chapter, the
qualitative findings are reported.
132
133
Chapter 6
IPO Performance and Governance: Practitioner Views
6.1 Introduction
This chapter presents the findings from the interviews conducted during the qualitative
research phase. Section 6.2 discusses the key findings relating to the study’s research
questions. Section 6.3 compares and contrasts the findings to the empirical studies
conducted previously, and section 6.4 provides a summary of the chapter.
6.2 Findings
The interviews conducted with CEOs/CFOs (Issuers), bankers and underwriters
(Underwriters), and retail and institutional investors (Investors) generated six key issues
critical to this study. These issues include corporate governance and IPO performance,
Main Board vs. SESDAQ, board characteristics and director ownership, role of venture
capitalists, lock-up period, and corporate governance index. The findings gathered from
the interviews address the first research question listed in Chapter 1: “What are the
views of CEOs/CFOs, investment bankers/underwriters, and institutional and retail
investors in relation to the factors that are used to construct the CGI, changes in board
structures, involvement of VCs, the impact of lock-up periods and other corporate
governance practices on the underpricing and long-run performances of IPOs in
Singapore?”
In the findings reported below, direct quotes have been used in most instances. In some
cases, deletions and additions were used to ensure comprehension where the meaning
was not clear from the verbatim extract. Interviewees’ identity codes (A represents
Issuers, B represents Underwriters and C represents Investors), position title, gender and
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number of years of working experience (as per Table 6.1A) have been placed beside
their extracts.
Table 6.1A: Profile of interviewees – Issuers
No.
Interview
(minutes)
Position Title
Gender
Experience
(years)
Main Board /
SESDAQ
A1
75
Chief Finance Officer
Male
27
Main Board
A2
63
Group Financial Controller
Male
22
SESDAQ
A3
108
Chief Executive Officer
Male
23
Main Board
A4
49
Vice President - Finance
Female
11
Main Board
A5
88
Group Financial Controller
Male
17
Main Board
A6
90
Chief Executive Officer
Male
20
SESDAQ
A7
67
Group Financial Controller
Male
18
Main Board
A8
83
Chief Finance Officer
Male
29
SESDAQ
A9
95
Chief Executive Officer
Male
31
Main Board
A10
51
Vice President - Finance
Female
16
SESDAQ
Table 6.1B: Profile of interviewees – Underwriters
No.
Interview
(minutes)
Position Title
Gender
Experience
(years)
Organisation
B1
65 Vice President
Male
25
Listed company
B2
58
Assistant Vice President
Male
21
MNC
B3
73
Executive Director
Male
35
Listed company
B4
63
Vice President
Male
23
MNC
B5
58
Senior Manager
Male
20
Listed company
B6
70
Executive Director
Male
30
MNC
B7
74
Assistant Vice President
Male
17
MNC
B8
50
Vice President
Male
19
MNC
B9
67
Senior Vice President
Male
27
MNC
B10
47
Assistant Vice President
Male
13
MNC
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Table 6.1C: Profile of interviewees – Investors
No.
Interview
(minutes)
Position Title
Gender
Experience
(years)
Industry
C1
80 Lecturer
Male
23
Education
C2
58
Senior Sales Manager
Female
25
Retail
C3
63
Partner
Male
18
Auditing
C4
45
Retiree
Male
43
-
C5
53
Senior Engineer
Male
15
Oil & Gas
C6
66
Financial Analyst
Female
12
Food & Beverage
C7
64
Vice President
Female
17
Banking
C8
71
Chief Executive Officer
Male
26
Manufacturing
C9
50
Vice President
Female
10
Banking
C10
56
Purchasing Manager
Male
15
Restaurants
6.2.1 Corporate governance and IPO performance
Corporate governance and IPO performance in the short run
In the context of this research, short-run refers to one year from the date of listing. Only
five of the 30 interviewees felt a positive relationship between good corporate
governance and IPO performance in the short-run:
When the company emerges from a private company to a public listed company,
the early adoption of good practices will facilitate the transition of a private to a
public company. Subsequent to the IPO, the company would remain competitive
as compared to others and remain attractive to all the investors, because good
corporate governance has been in place. Therefore, good corporate governance
during the IPO stage would help to contribute to the short-run performance.
(A1, CFO, male, 27)
Good corporate governance does affect long-term and short-run performance.
(C10, Purchasing Manager, male, 15)
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The remaining 25 interviewees felt there is a weak or no relationship between the two.
Most interviewees from the Underwriters and Investors groups shared a common view
that corporate governance is merely a compliance exercise undertaken by management
to protect the interests of investors, and it does not really affect IPO firms’ short-run
operating performance as measured by profit, cash flow and share price.
Corporate governance to me is a standard to demonstrate to the public
shareholder that we follow a set of rules and certain decorum, to show clearly
that the affairs of the ways the company being directed, to allow a certain level
of integrity and internal control within the company…it does not have any
impact to the IPO short-run performance. (B10, Assistant Vice President, male,
13 years’ experience)
Well, to me, CG is just a set of policies and procedures affecting a way a
corporation is directed, administrated or controlled…IPOs with good CG does
not mean they will perform well in both short-run and long-term. (C2, Senior
Sales Manager, female, 25)
Reflecting this position, some interviewees from the Investors group reported that they
do not look for corporate governance measures when making short-run investment
decisions and follow market sentiments:
If I am investing in a company for a short-term purpose, probably I would not
look at the corporate governance. I will be more interested in the P/E ratio and
market sentiments at that time. (C6, Financial Analyst, female, 12)
I would say on the shorter term, good corporate governance probably would not
help the IPO firms too much. Other factors, like share price performance,
issuing managers, issue size and market sentiment, are other factors that would
likely to have more impact in the short run…These factors to me are more
important when I make investment decision. (C5, Senior Engineer, male, 15)
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It appears that Investors may look for other variables, such as those mentioned above, to
evaluate IPO performance in the short-run, and believe that these variables are not
necessarily associated with good corporate governance, at least in the short-term. These
views expressed by Investors were also well supported by the Underwriters, who
reported that the general economic outlook and stock market performance were the key
driving forces affecting IPO performance in the short-run:
The short-run performance is still very dependent on market conditions. Even a
very well-run company with a strong board, independent directors with very
well-known names, in the short-run, may also not be doing very well. We know
that when the stock market is not performing, there are not many IPOs in the
market. In such lacklustre performance of the market, corporate governance
does not have very much impact on the performance. (B6, Executive Director,
male, 30)
Basically, I do not think good CG practices have any material impact on short-
run performances. Good CG practices take some time, perhaps a few years, for
investors to realise its importance on firms’ long-run performance. (B2,
Assistant Vice President, male, 21)
The responses from the Issuers group were more mixed. Some Issuers maintained that
corporate governance played a critical role in IPO short-run performance, while others
believed it is merely a compliance issue and only affected a firm’s long-term
performance:
When the company emerges from a private company to a public listed company,
the early adoption of good practices will facilitate transition of a private to a
public company. Subsequent to the IPO, the company would remain competitive
as compared to others and remain attractive to all the investors, because good
corporate governance has been in place. Therefore, good corporate governance
138
during the IPO stage would help to contribute to the short-run performance.
(A9, CEO, male, 31)
I don’t think there is any significant influence because the period is too short,
whereas for long-term performance, i.e. three or five years, corporate
governance would play an important role because it sets in place a framework
for your growth, for your future direction. (A2, Group Financial Controller,
male, 22)
More diverse views of the Issuers on the role of corporate governance and IPO
performance relative to those of the Underwriters and Investors may suggest that the
Issuers, being the ‘executors’ of the corporate governance, face more challenges and
pressure from regulators when implementing good corporate governance practices. As a
newly listed company on the stock exchange, they have to comply with the stock
exchange listing rules by providing detailed disclosure of corporate governance
practices. Investors and Underwriters may not share this view as they are outsiders to
the firm and are not involved in the implementation of corporate governance practices.
As a result, they may attribute the firm’s short-run performance to external factors such
as market sentiment and economic policies rather than the effectiveness of corporate
governance:
CG is just another boring exercise meant for management to conform and it’s
certainly got no practical implication with the firm’s performance in the short-
run! The management just do it for the sake of doing it and I never look at CG
when I evaluate the IPO performance. To me, market factors are more
important. (C4, Retiree, male, 43)
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Corporate governance and IPO performance in the long run
All the interviewees agreed that corporate governance has an impact on IPO firms’
long-run performance. Many interviewees maintained that companies with adequate
corporate governance measures would be rewarded with an increase in share price,
which is a sensitive measure of shareholders’ wealth. They believed that investors
would be willing to pay a premium for IPO firms that have sound corporate governance
structures, which they understood to translate to healthy business growth and an
increase in long-term shareholder value:
I think in the long-term good CG practices would have a strong impact on the
firm’s long-term performance reflected in its share price. A strong board would
ensure that its management is held accountable; the board is held accountable
to all the shareholders and the stakeholders. Everybody’s interests are in line
through delivering strong profit growth and also it will be reflected in the share
price. In the long-term, good GC practices would have a positive impact on IPO
firms’ long-term performance. (B3, Executive Director, male, 35)
I think this is the main objective for the good corporate governance. In the long-
run, people would pay a premium to the company…the trust the shareholders
build on the company, as they believe good corporate governance equals good
business...that is the beauty of the governance in the long-run. However, results
may not be seen immediately after implementation of the good practices. (A8,
CFO, male, 29)
The second quote implies that there may be a time gap between the implementation of
corporate governance structures and financial results. For instance, having an effective
internal control system in place immediately after going public is unlikely to guarantee
an increase in profit within one year.
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Many interviewees maintained that after IPO, many firms will undergo several changes
in their corporate governance structures and practices to align with the interests of
insiders and outside shareholders. Specifically, they felt that ownership concentration of
large shareholders and board independence would increase after the IPO, so that there
would be higher incentives to maximise the firm’s value. In addition, they believed that
effective and transparent corporate leadership and control would strengthen the
company and make it attractive for investors.
I think the advantages of good corporate governance cannot be seen in the
short-run. Whereas in the long-run, investors would be likely to seek to obtain
more information and would want to see things are done properly, and this is
when changes in corporate governance structures become important…Through
good CG practices, you have a strong and stable board with a high level of
independence and effective management. It’ll take a couple of years for the
results to show. In that sense, it will be reflected in the share price of the
company. (B2, Assistant Vice President, male, 21)
Stability of the management, stability of the board, stability of the business, and
a credible executive committee as well as an independent board are key to long-
term performance, whether the company is around in three years, ten years, or
twenty years. So, corporate governance is extremely important in the long-run.
(C1, Lecturer, male, 23)
The above quotes imply that sound corporate governance was considered indispensable
in protecting long-term interests of the stakeholders and thereby ensuring companies’
long-term survival.
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6.2.2 Main Board vs. Second Board (SESDAQ)
Underwriters and Investors were asked their views on the difference between companies
listed on on Main Board and the SESDAQ with respect to their IPO underpricing and
long-term performance. The Issuers were not interviewed on this topic as they might see
it as a sensitive issue, especially those directors whose companies were listed on the
SESDAQ. Despite having different listing criteria between the two boards, most of the
interviewees asked this question, including all the Investors, and expressed the opinion
that there is essentially no difference between the two boards. The following quotes
illustrate that the adoption of a largely similar valuation technique was the main reason
for these investees’ perception that there is no significant difference between the two
boards:
I do not think that in terms of valuation that it has a significant difference
between Main Board and SESDAQ companies, because the valuation
methodologies that are used, the market is about the same. (B1, Vice President,
male, 25)
I don’t think there is isolation between SESDAQ and Main Board as they both
represent listed companies that may have similar valuation methods. In fact, I
believe the performance of these companies really depends on market condition
and environment rather than being SESDAQ and Main Board. It also depends
on the sustainability of the business model of the company. (B10, Assistant Vice
President, male, 13)
Two underwriters commented that it is quite common to see some institutional investors
choosing to invest only in IPOs that are listed in either or both boards, while other
institutional investors invest according to other investment criteria that are not
associated with the listing status:
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I don’t think there’s not much difference between Main Board IPO and SESDAQ
IPO when comes to underpricing and long-term performance…Obviously there
are some investors, i.e. fund managers who have the mandate to only invest in
Main Board companies. There may be fund managers who only invest in
SESDAQ, but if you talk about in terms of pricing, typically unless they have a
mandate, they are not too concerned whether it’s Main Board or SESDAQ
companies. (B2, Assistant Vice President, male, 21)
For sophisticated institutional investors, maybe at the very high level, they
already have their distinction, they don’t buy penny stocks. So even for a lot of
Main Board that are penny stocks, like blue chip investor fund e.g. Aberdeen
etcetera, they only buy stock indices, i.e. blue chip SIA, banks and all your big
companies. They already have their own mandate and criteria for the company
to invest, so they don’t need the distinction between Main Board and SESDAQ
because they are simply categorising into two simple categories by size. I think
retail investor don’t care and institutional investors have their own criteria, so it
doesn’t really matter, and I just don’t see any difference in the underpricing and
long-term performances between the two boards. (B6, Executive Director,
male, 30)
However, more than half of the Underwriters felt that there could be some differences in
underpricing and long-run performance between Main Board-listed IPOs and SESDAQ-
listed IPOs. They argued that Main Board-listed IPOs are subject to more stringent
listing criteria compared to their counterparts listed on the SESDAQ. They believed that
Main Board-listed IPOs generally have longer trading histories and are less risky and
better quality with respect to liquidity, profitability and trading volumes. In contrast,
they argued that since the SESDAQ listing is meant for smaller IPOs which may have a
higher risk compared to their counterparts on the Main Board, investors may tend to
value a SESDAQ IPO less favourably than a Main Board IPO. Thus, the risk premium
will be lower for the latter. The following quotes illustrate their views:
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Although most investors may only be bothered by which IPO gives them a higher
return and they will not be bothered so much about the listing status, I do see a
difference in the underpricing and long-run performance between the Main
Board listing and SESDAQ listing. This is due to the fact that Main Board-listed
IPOs are listed with more stringent listing criteria compared to SESDAQ-listed
IPOs. Investors may perceive that the latter are more risky and may not be as
actively traded compared to the Main Board-listed IPOs. Thus, underpricing is
more likely to be found in Main Board-listed IPOs as these firms may
underprice their shares to signal to investors that they are able to show better
returns in the short-run and superior performance in the long-term. (B9, Senior
Vice President, male, 27)
From my experience in the Singapore stock market for the past 20 years, I do
see a difference in the underpricing of IPOs on Main Board versus those IPOs
on SESDAQ. It seems to me that SESDAQ-listed IPOs are experiencing a
higher underpricing than Main Board-listed IPOs, as investors may demand a
higher return to compensate them for investing in a relatively higher risk
SESDAQ IPO. As for long-run performance, I have no doubt that the Main
Board-listed IPOs generally perform better than SESDAQ-listed IPOs. (B5,
Senior Manager, male, 20)
I don’t think there is isolation between SESDAQ and Main Board, it really
depends on the market condition and environment rather than being SESDAQ or
Main Board. It also depends on sustainability of the business model of the
company. (B7, Assistant Vice President, male, 17)
Of note is that there is some variation in the views expressed with respect to the
underpricing of IPOs. The first underwriter applied signalling theory to justify his view
while the second applied risk-return trade off to support his argument, and the third
believed in the soundness of the business model of the IPO firm. While there were
contrasting views among the Underwriters, all Investors did not see any difference in
underpricing and long-run performance between the two groups of IPOs. Many reported
that they do not pay particular attention to firms’ listing status. Instead, by reviewing the
144
firm’s past performance and future forecasts in its IPO prospectus, they believed that it
is more critical that firms are able to demonstrate strong growth and stability in both the
short-term and long-term:
I think right now, what you see in the market is that there is actually not much
distinction. If it is good enough to be listed, it is just basically the size of the
company that is the difference. What investors are buying is a good company
with the correct fundamentals and positive industry outlook. So, I don’t think it
really matters to care about whether the IPOs are listed in the Main Board or
SESDAQ. (C6, Financial Analyst, female, 12)
To me, as a retail investor, when I go to Kay Hian or elsewhere to buy stocks, I
just see company A, B, C or D, and I don’t care whether they are listed on the
Main Board or SESDAQ. It is the company’s current performance and future
prospects that matter to me. (C4, Retiree, male, 43)
In sum, the views gathered from Underwriters on whether there is a difference in
underpricing and long-run performance between Main Board-listed IPOs and SESDAQ-
listed IPOs were mixed, while all Investors interviewed did not see any difference
between the two. Investors were more concerned about whether the IPO firm’s
forecasted results reported in the IPO prospectus would materialise rather than listing
status.
6.2.3 Board characteristics and director ownership
Investors were asked to share their views on the various board characteristics such as
board size, board composition, separation of CEO and Chairman, and director
ownership, both pre and post IPO and in the three years after listing.
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Board size and composition
The board of directors is generally considered to be the most critical component in the
company’s future direction and it is also an apex of internal decision control systems of
the organisation. Half of the interviewees felt that larger boards could improve
corporate performance because they have a range of expertise to assist in decision-
making, and it is harder for a powerful CEO or Executive Chairman to dominate:
The good thing about a large board is that they have good internal controls and,
people act as a check, so it is harder for someone to pursue their personal goal
to the detriment of shareholders or other stakeholders’ objectives. (C7, Vice
President, female, 17)
I think the trend now is that companies are focusing more and more on
corporate governance other than the financial performance. Since there is an
increasing level of awareness in adopting good practices, board size will
inevitably become an important issue. Larger board size and with a good mix of
directors with different skills will ensure more effective control and decision-
making. (C6, Financial Analyst, female, 12)
On the contrary, two interviewees argued that large boards in organisations that are
hierarchical and centralised may result in less effective communication, coordination
and decision-making:
If the board size is huge and comprises of members having a wide range of
expertise, then the channel of communication will be large and decisions will
also be delayed. (C1, Lecturer, male, 23)
Because when the board is too big, probably it’s not easy to come to a
consensus about decision-making…some directors may become passive
members and merely follow the majority’s view. (C3, Audit Partner, male, 18)
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The above responses illustrate how the two interviewees felt that large boards
comprised of members from diverse backgrounds may not easily come to a consensus
within a short time frame. In addition, in a large board, there could be a tendency for
directors to ‘free ride’, thereby leaving decisions to a very small group of individuals or
to board committees.
Three interviewees reported that there is a positive relationship between firm and board
size and monitoring costs, such as directors’ fees and running costs. Thus, they
considered it important for the firm to weigh the benefits of having a larger board with
the higher monitoring costs:
I think the issue on board size is not crucial to me, as long as there is a
reasonable board size with low running costs, at the same time providing higher
benefits. It shouldn’t be too large, it should be of sufficient size that it is able to
house the expertise and experience adequately and, able to contribute to the
company’s growth and performance. (C9, Vice President, female, 10)
Board size should be in line with the size of the company. You can’t expect a
small firm to have a big board size as it increases the cost. Therefore, it should
accommodate to the needs and requirements for each of the companies, so it
varies. (C5, Senior Engineer, male, 15)
If the board is small and relatively independent of management, a strong case
can be made for doing away with certain board committees. This can save both
directors’ fees and other additional fees that have to be paid to directors to
serve on or chair these board committees. (C1, Lecturer, male, 23)
More than half of the interviewees felt that the quality of the board was far more
important than size per se, in both the short- and long-run:
147
Board size is not significantly important. As what we see, many successful
companies did not really have the ‘correct’ board size. It is difficult to define
what a ‘correct’ board size is. Anyway, I don’t see any direct relationship
between the board size and performance, whether in the short- or long-term.
(C8, CEO, male, 26)
It does not mean the bigger the size of the board, the better it is. Quality is the
main criteria, board size is not very important. (C4, Retiree, male, 43)
For these interviewees, board quality was more important than board size. The Code
does not explicitly state the ideal number of board members. Instead, it states that the
board should be comprised of directors who, as a group, provide core competencies
such as accounting and finance, business and management experience, industrial
knowledge, planning expertise, and customer base experience. In sum, many
interviewees believed that it really depends on each individual firm to justify the
number of board members required and to ensure that the benefits of having a larger
board with a good mix of members with relevant experience outweighs the costs.
An optimal composition was seen to enable the IPO firm to make decisions that will
maximise shareholders’ wealth:
Board composition is very important because these are the people who will
govern the company over the long-term, hence who they are is very important.
For instance, if a person is well-known for turning a company around happens
to be one of the members on board, the investors would have confidence over the
management, and thus invest in the company. (C10, Purchasing Manager, male,
15)
148
A majority of the interviewees reported that having a good mix of independent board
members with diverse skills and experiences provides the creativity, flexibility and
competitiveness that an IPO organisation needs to cope with increased environmental
uncertainty:
I see the importance of board composition to an IPO from two perspectives.
Firstly, having the right mix of people in the board will enable the firm to cope
with a high degree of business uncertainty brought by intensifying global
competition, rapid technological changes, and shifts in the demographics of
labour as well as client base. Secondly, those independent directors that have
strong business acumen and are technically competent in core areas, such as
accounting and finance, customer relationship management and strategic
management, will be able to contribute richly to board decisions from an ‘all-
rounded’ perspective. (C7, Vice President, female, 17)
While gender was not a variable included in the interview guide, two interviewees
brought up the critical role that women can play in increasing corporate value:
It is sad to see many listed companies in Singapore not having women on the
board.....better corporate governance can also be achieved by having women on
the board of directors… (C6, Financial Analyst, female, 12)
Having feamle independent directors are good in the sense that they may have a
better understanding of investors’ behaviour, customers’ needs…having women
in the board can result in superior earnings and shareholder wealth. (C9, Vice
President, female, 10)
Both of these interviewees were female, which may suggest that their views are not
representative of all the interviewees. Nevertheless, it is possible that the existence of
female independent directors may offer some ‘refreshing’ views to a male-dominated
board.
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Separation of CEO and Chairman
Most of the interviewees see the separation of CEO and Chairman roles as good
corporate governance practice. Among them, two interviewees expressed the view that
division of labour and guidance could be the key reason for role duality:
The Chairman is actually responsible for the leadership of the board, and
ensuring its effectiveness, setting a clear business and financial strategy for the
group, and giving recommendation for the board. Whereas for the CEO, his
main duties are to deliver the strategic and financial objectives of the board.
(C5, Senior Engineer, male, 15)
It is important to segregate the CEO from the Chairmanship of the board as it
allows better accountability for the management of the company to hire a board,
to be able to assess their performance and to operate independently, appraise
and review the performance of the company. (C3, Audit Partner, male, 18)
The above views highlights the importance of separating the Chairman and CEO roles
as the Chairman plays a key role in ensuring that the Board discharges its role of
approving strategies developed by management, ensuring that these strategies are
implemented and monitoring management performance. According to these
interviewees, if the Chairman is not independent of the management then this individual
can adversely influence the way the Board functions.
Although most interviewees felt that role separation is critical, they acknowledged that
it may not be easy or practical. For instance, a few interviewees commented on the
difficulty of the separation of the two roles in many IPO firms as the CEO-cum-
Chairman is often the person who founded the business. As such, these individuals
possess in-depth knowledge of the business and remain highly dominant in decision
making and retain control over the board:
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In my personal observation, I don’t think it is important, for an IPO firm. The
founder might still be pretty much involved in the operations of the company,
acting as both CEO and chairman. I would say, in an ideal case, you may want
it to be segregated. I wouldn’t think that it is very bad anyway for the founder to
hold both the positions of CEO and chairman. To me, it is absolutely acceptable.
(C6, Financial Analyst, female, 12)
I do see many IPO firms having their founders playing a dual role and if we
were to separate the roles of the Chairman and CEO, the founder would still be
the most influential person. Therefore there is not much usefulness by separating
the two. (C8, CEO, male, 26)
In addition, two Investors expressed their view that pride could be the reason for having
role duality, especially for small and medium sized entities (SMEs) where the founder
was often both the CEO and Chairman:
The CEOs of many SMEs are normally the founder of the business, they might
not buy the story of putting another Chairman on top of him to run a business.
(C7, Vice President, female, 17)
SMEs are in a niche business and not everyone can do the job, except for those
like the founder who are in the business for more than 10 years. To ensure
continuity and control of the business they had built up, many founders would
feel more comfortable to pass their business to their children…they will have
‘no face’ if their business is taken over by outsiders. (C8, CEO, male, 26)
The above remarks suggest that some CEOs of SMEs are uncomfortable having
outsiders assuming the role of CEO and Chairman, as they feel there is no continuity of
the business within the family. In addition, the interviewees felt that having an outsider
running the company may diminish the CEO’s dominance in decision-making and
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conflicts are more likely to arise between the CEO and outsiders compared to having
their family members run the business.
Some interviewees felt that it has always been a challenge for companies, especially
SMEs, to hire the ‘right’ candidate to run the post of CEO and Chairman separately
because Singapore is a small country with limited resources and human capital. In
addition, they argue that many SMEs find it cheaper to hire a director to play the dual
role rather than hiring two separate directors to assume the roles of CEO and Chairman:
It has been widely published that Singapore is lacking competent directors…and
our government recognizes this fact…it has to attract foreign talent to come
here to manage some of its affiliated companies. Thus, for those smaller
companies and even in the private sectors, having one person to be appointed as
CEO-cum-Chairman is common. (C1, Lecturer, male, 23)
In a highly competitive environment, many SMEs’ CEOs resort to a cost cutting
initiative by appointing fewer directors on the board in order to lower directors’
fees. (C9, Vice President, female, 10)
While most interviewees supported the notion of having separation of the two roles, few
noted that role duality is acceptable as long as companies are able to have more
independent directors on the board to serve as watchdogs to ensure that the CEO-cum-
Chairman is performing and making decisions that are in line with shareholders’
objectives:
It is ok to have the same person provided that there should be more independent
directors on the board. (C4, Retiree, male, 43)
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If the chairman and the CEO are the same person, or related by close family
ties, the company may appoint independent directors to lead the independent
director. (Senior Engineer, male, 15)
In sum, many interviewees saw the importance of having two separate individuals but
most acknowledged the practical difficulties of separating the roles in a Singapore
context. Despite disparity in the practical reasons gathered, most interviewees in the
three groups felt that as long as the directors of the IPO firm are able to deliver what
they have promised to investors then they are not overly concerned about the duality
issue. The following quote summarises this:
I would not be bothered about whether they are two persons, rather whether
they could deliver what they have promised. And I would not regard it as too
important. (C10, Purchasing Manager, male, 15)
Director ownership
Most of the interviewees expressed the view that director ownership is critical to the
IPO, both in the present and over the next three years:
I think this is something investors are looking for, they would like to see the
directors, and being the major shareholders...it is important to get the directors
to hold their shares at the initial stage and also in the long-term. (C6, Financial
Analyst, female, 12)
I think the importance of director ownership applies at the IPO stage and also in
the long-term. (C8, CEO, male, 26)
Several interviewees argued that at the pre-IPO stage, most directors are shareholders of
the firm and the agency problem is virtually non-existent. However, they felt that when
the firm decides to go for IPO, some of the directors, especially the founders of the firm,
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are likely to sell the vendor shares to the public or other institutional investors, thus
causing a dilution in their shareholding:
In order to show commitment to the shareholders, directors should not be selling
a significant amount of the shares at both the IPO stage and in the long-run.
This is to ensure the continuing commitment to shareholders through running
the company operationally and strategically. (C9, Vice President, female, 10)
Some interviewees noted that founders who remained as directors upon listing were
more likely to be motivated in running the firm in the best interests of shareholders.
They maintained that high ownership concentration reduced information asymmetries
and made it easier for the management to make both short-term and strategic decisions.
Because if there is a low level of ownership by the management, the company is
very often associated with low corporate value. Thus, increasing the chances of
being taken over because the management may feel that this is not their
company after all, without a sense of belonging that somehow dampens the
motivation of the management team. (C1, Lecturer, male, 23)
It’s better for the company’s directors to own more shares because they would
take more pride in their work and they will help the company to improve in the
long-run. As the company grows they will grow in terms of their personal
wealth. (C7, Vice President, female, 17)
While the motivation issue was raised by few interviewees as a key reason for
ownership retention, others expressed concern over the level of independence as they
considered it to be critical in determining the level of influence the directors would have
over the company:
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I think it depends on which type of directors...In the case they are holding some
interest in the firm, most likely it encourages them to act in the best interest of
the firm, since they are the shareholders. On the other hand, there might be a
conflict of interest, especially for the independent directors, when they hold
certain shares. It may impair the ability for them to remain independent. (C5,
Senior Engineer, male, 15)
At one side, there is an agency problem, but it will also promote the motivation
since the directors do have the same interests as the shareholders of the
company. (C4, Retiree, male, 43)
Some interviewees questioned the effectiveness of companies that have too many
directors with multiple directorships. Their argument was that an individual holding too
many directorships will find it difficult to contribute adequately:
As executive directors are being employed on a full-time basis, having
directorships in many other companies may restrict their contributions to the
company in which they hold an executive position. It may also limit their
contribution to the boards of the other companies in which they hold. (C3, Audit
Partner, male, 18)
The company’s independent directors are over-committed as many of them are
holding multiple directorships in many companies and also having a full-time
job. Due to their work commitment and tight schedule, they only meet each
other through board meetings, which are held once every 2-3 months. (C9, Vice
President, female, 10)
These interviewees were concerned that directors holding multiple directorships may
impair the quality of decision-making because they are overstretched and unable to stay
focused.
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6.2.4 Role of venture capitalists (VC)
The Underwriters were asked to offer their views on the role and importance of VCs to
IPO firms. All maintained that at the time of going public, VC-backed IPOs have more
independent outsiders and fewer insider directors compared to non VC-backed IPOs.
The expectation was that VCs would perform an independent role by influencing board
characteristics, internal control systems and financial reporting qualities before and after
these firms enter the IPO process.
VC-backed companies have more independent boards, audit and remuneration
committees, and more likely I see a separation of the role of the CEO and
Chairman of the board. (B4, Vice President, male, 23)
Typically, underwriters and investors at large typically view VC-backed IPOs
more favourably compared to those without VC-backing. The main reason being
firms with VC-backing would have due diligence done, to a certain extent, so
control, systems and management supposedly would be better off as they would
have been advised by the VC people. Thus, instances of fraud will be less likely.
(B3, Executive Director, male, 35)
Four of the Underwriters noted the importance of VC quality. They reported that IPOs
backed by higher quality VCs are more appealing because reputable VCs should be
more competent and have greater incentive to protect their reputation by establishing
sound corporate governance practices in their portfolio firms:
From an underwriter’s perspective, we are usually more inclined to take on
deals that are VC-backed, especially those VCs with a good reputation. Because
for us, when we sell the deal, it’s good to have shareholders who have a good
brand name. (B7, Assistant Vice President, male, 17)
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I supposed if the VC comes with a strong pedigree, the VC with big names, the
big boys. Investors will definitely be very comfortable if, let’s say, the company
has a very strong VC backed because there’s another independent guy that has
an interest that is in line with us. (B8, Vice President, male, 19)
6.2.5 Lock-up period
The Underwriters were asked to provide their views on the importance of having a lock-
up period for IPO firms. All of them agreed that the lock-up agreement and the lock-up
period have a favourable impact on IPO performance. Many argued that lock-up
agreements served two purposes for underwriters. Firstly, they stabilize market prices
during the lock-up period by committing founders of IPO firms to not dispose shares
during this period to prevent a significant fluctuation in the share price that could occur
if the founders disposed of a material portion (or all) of the shares held after IPO.
Secondly, it serves as a commitment for the founders to other shareholders that they are
confident of the IPO performance in the long-term:
I think it is definitely necessary because you don’t want a situation where the
founder of the listed company, i.e. the controlling shareholders, to go for IPO
and straight away sell their shares, and then make money, and have no
commitment to run the company anymore. To me, it stabilizes the market in
terms of certainty. You won’t have a situation where the controlling shareholder
with 70% shares starts selling in the market, the price will just plunge and act as
a distress signal to the public. (B6, Executive Director, male, 30)
Lock-up agreement serves to show that the founders are committed and
confident of the long-term performance of the IPO. (B5, Senior Manager, male,
20)
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The above views suggest that the ultimate aim of imposing a lock-up agreement for
IPOs is to protect investors’ interests during the lock-up period. However, when the
lock-up period expires, it is expected that some of the founders may dispose of a certain
percentage of the shares held and such a disposal may have an impact on the share
price, which may act as a distress signal to the market. The swing of the share price may
also depend on market forces and investors’ perceptions of the IPO firm’s performance
in the future. Thus, lock-up agreements can act as a deterrent for existing shareholders
to find an easy exit route by liquidating their shares immediately after the IPO. Also, it
gives prospective investors some confidence that the founders are committed to
bringing the IPO firm on board and to ensure its sustainability during the lock-up
period.
6.2.6 Corporate governance index (CGI)
The centrepiece of this study is the use of the CGI adapted from a scorecard developed
by Mak (2007) for all listed companies in Singapore. The mechanics of applying the
CGI has been dealt with in Chapter 5. As the CGI used in this study was confined to
IPOs in Singapore, it bears little resemblance to other CGIs employed by previous
empirical studies conducted for listed companies in various countries (Klapper & Love
2004; Durnev & Kim 2005), and in different countries such as the US (Gompers, Ishii
& Metrick 2003; Bebchuk, Cohen & Ferrell 2005; Aggarwal et al. 2007; Brown &
Caylor 2009), China (Bai et al. 2003; Li 2005), Germany (Drobetz, Schillhofer, &
Zimmerman 2003), Hong Kong (Lei & Song 2004; Cheung et al. 2007), Korea (Black,
Jang & Kim 2006), Russia (Black 2001), Taiwan (Chen et al. 2007) and the UK (Luo
2006). There do not appear to have been any prior studies conducted using CGI to
measure the performance of IPOs in Singapore.
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To ensure the initial CGI adapted from Mak (2007) could be applied to IPOs in
Singapore, interviewees were asked about their views on weightage of the sections and
items found in the CGI, any sections or items which may not be applicable to IPOs and
also additional sections and items which may need to be incorporated in the CGI.
Weightage of the sections and items
Most of the interviewees felt that the CGI sections and items were well constructed and
of equal importance. Many argued that the relationship between effective corporate
governance practices and firm performance cannot be measured by one or a few aspects
of corporate governance:
Overall, I think all the indexes play an equal importance to a company in order
to practice good corporate governance. (A3, CEO, male, 23)
I think all the components here should be weighted equally. Just like a building
block, you cannot have one foundation piled on three legs with one leg that is a
bit loose. It does not work that way. (A7, Group Financial Controller, male, 18)
These interviewees maintained that the use of an equally-weighted CGI will provide a
more comprehensive measure to examine the relationship between the effective
corporate governance practices and firm performance. The remaining few interviewees
were either unable to comment on the weightage due to lack of technical knowledge on
the CGI or they viewed the weightage as unimportant.
Sections or items that may not be relevant
Interviewees were asked to provide their views on sections or items of the CGI that may
not be applicable to IPOs in Singapore. Most interviewees felt that all the sections and
items were highly relevant:
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Looking at the category, it’s already very comprehensive. In fact, only
companies with the best corporate governance are able to meet all of the
criteria. (A1, CFO, male, 27)
I think the list is pretty comprehensive. Most of the points are covered in
the CG code and for listed companies as well. Currently, I don’t think
there’s any point that I can add on. (B7, Assistant Vice President, male,
17)
However, two interviewees expressed concern over the Board’s Conduct of Affairs
section of the CGI. They felt that the disclosure of the frequency of board committee
meetings and individual member’s attendance may not apply to IPOs as they may not
have set-up the entire board prior to IPO and are often founded by the owners, who may
not hold formal board meetings with well-documented agendas:
At the point of IPO, the most important thing would be getting the board in
place, the Chairman, the CEO and all that, but things like conduct of affairs,
meetings they are going to attend, who attended the meetings, and the number of
meetings that each member had attended are not necessary. (B4, Senior Vice
President, male, 23)
Some interviewees questioned the relevance of items found in the Communication with
Shareholders section. They argued that many IPO firms may not incorporate any
information pertaining to investor relations prior to IPO. The reasons were twofold.
Firstly, they believed that the investors of these pre-IPO firms were founders themselves
and their family members. Thus, they were ‘self-accountable’ and need not publish any
financial and sensitive information on their corporate websites to outsiders. Secondly,
disclosure of this information could invite unnecessary attention from competitors,
especially the larger players in the same industry as the IPO firms:
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Communication with shareholders might not be so relevant to IPOs because
usually before IPO, the company comprises of closely knitted relationship
members like family owners and close associates. Before IPO, their board
meetings are usually family affairs, usually it’s well done and you do not need a
website to communicate with shareholders. But after IPO, then you start to
gather more shareholders and, you gather ways to communicate with the
shareholders. So, before IPO, that category is not that relevant. (B9, Senior
Vice President, male, 27)
The items on the ‘communication to the shareholders’ will not be applicable to
pre-IPO firms, whereby they actually do not have shareholders because mostly
the directors are the shareholders themselves...too much disclosure prior to IPO
may warrant uninvited competition from other players. (A9, CEO, male, 31)
Based on the above comments, an item related to the adequacy of internal controls
stated in the annual report found in the Internal Audit, Internal Control and Risk
Management section was removed as IPO firms do not provide annual reports publicly
prior to IPO. In addition, the last three items found under Communication with
Shareholders section were also deleted as it would be impractical to establish whether
there was a website that dealt with investor relations at the point of listing as all of the
IPOs incorporated in this study were listed between 2000 and 2007. As a result of the
change, the entire Communication with Shareholders section was withdrawn (refer to
Appendix 2).
Additional sections and items to be included in the CGI
Several interviewees offered constructive suggestions for additional items that could be
incorporated into the CGI. One of the items suggested by three interviewees was the
inclusion of disclosure of family relationships among the directors of the IPO firms:
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I believe the CGI should have an item that covers disclosure on family-linked
relationships among the directors, as I have underwritten quite a number of
IPOs where the companies were family-run businesses. I think investors would
be interested to know the relationship among the directors. (B9, Senior Vice
President, male, 27)
The interviewee quoted above felt that investors may be concerned about relationships
amongst directors, especially if they have family ties. As such, they may want to know
the degree of involvement by each of the family members prior to, and after, going
public. Some of these family members may not continue to run the business when it
goes public, while others may continue to play a significant role in assuming an
executive role on the board. For instance, the Code recommends that the CEO and
Chairman should be separated. Prospective investors may want to know whether these
IPOs were run by the same person playing dual roles, two independent individuals, or
two people who are related. While the latter comply with the best practices stipulated in
the Code, in substance the power of control may still lie in the hands of the family
members:
I see the importance of separating and having adequate disclosure of the role of
the CEO and Chairman. However, if the two persons running the two roles are
father and son, then I will doubt the independence of the Chairman. (C2,
Partner, male, 18)
Three other interviewees brought up disclosure of related or interested party
transactions in the CGI. Essentially, a related party transaction is a ‘transfer of
resources, services or obligations between related parties, regardless of whether the
price is charged.’14 According to Financial Reporting Standards (FRS) 24, adopted
14 FRS 24: Related Party Disclosure, para. 9.
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from the International Accounting Standards Board, parties are considered to be related
if one party directly or indirectly has the ability to control or jointly control the other
party or exercise significant influence over the other party in making financial and
operating decisions or is a member of the key management of the firm:
The company should refrain from overwhelming itself with related party
transactions. I think the CGI should include disclosure of related party
transactions. (C1, Lecturer, male, 23)
Related party disclosures such as interest-free loans or loans granted at below
market rate are critical and should be included in the CGI. (B4, Vice President,
male, 23)
These interviewees maintained that related party transaction disclosures in IPO
prospectuses were of paramount importance to prospective investors as these
transactions would not have taken place if they were not related parties. For instance,
directors who were founders of the business had granted interest-free loans to the
company before it went public. Disclosure could be critical as these loans would have
an impact on the financial performance (effective interest would have been computed)
as well as the financial position of the company (both the principal and actual interest
outstanding would have been reported as liabilities). If such disclosures were not made
at the point of IPO, investors might have the wrong perception that such loans were
interest-free. In addition, they may believe the firm reported higher profits and net
assets. Thus, key ratios such as interest cover, gearing and return on capital employed
would be erroneously computed.
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Three interviewees raised the possibility of including succession planning in the CGI:
Succession planning is important for the continuity of the company strategic
plan, performance and growth, especially in family-run businesses. Many large
Singaporean companies today, such as C.K. Tang, UOB, Eu Yan Sang, City
Development and Qian Hu, were started by founders who went on to build
family empires. It should have been covered under the ‘Remuneration and
Executive Resource Matters’ section. (B1, Vice President – Finance, male, 25)
I think the index should cover succession planning as investors would like to see
the company’s long-term plan in grooming senior managers to take up
management role when the firm is doing well. (B3, Executive Director, male,
35)
I don’t need to know exactly who the successor to the CEO is. More important is
to have a succession plan in place and to disclose such plans in the prospectus.
(C4, Retiree, male, 43)
The responses cited above specifically stressed the importance of succession planning
for family owned businesses. The interviewees felt that they knew relatively little about
the process of succession planning in these firms when they went public. Therefore,
these interviewees believed that the board should disclose whether it has established a
succession plan for key executives and other board members, to ensure that there is a
strategy for continuity of operations with minimal disruptions to the firm’s vision and
objectives.
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6.3 Discussion
This study focused on the role of corporate governance on the performance of IPOs in
Singapore. The information gathered from the interviewees provides practical insights
into stakeholders’ views of the importance of corporate governance for companies
going public. The results gathered from their discussion will be beneficial to companies
seeking listing in Singapore in the future. The underwriters shared views pertaining to
differences in the performance of Main Board and SESDAQ companies, the reputation
of underwriters in relation to IPO performance, the role of VCs, and the impact of lock-
up periods on IPO performance. Many of their views were in line with the results of
empirical studies as outlined below. The interviewees from the Investors group
provided practical views on the importance of corporate governance for investment
decisions, as well as their views on board characteristics and director ownership.
Although their views were diverse and may not represent the views of all investors,
there was evidence of concern over the importance of corporate governance in the long-
run performance of IPOs, and most of the investors believed that much can be done to
enhance existing corporate governance practices in Singapore.
A few of the interviewees from the Issuers group felt that there is a positive relationship
between good corporate governance and long-run IPO performance. They reported that
firms with superior corporate governance practices should perform better than those
with relatively poor practices. They also argued that investors consider firms’ corporate
governance practices when making investment decisions. These arguments are well
supported by numerous empirical studies (Gompers, Ishii & Metrick, 2003; Durnev &
Kim 2005; Chueng et al. 2007; Brown & Caylor 2009). However, the majority of the
interviewees maintained that there is no association between corporate governance
practices and short run IPO performance. They felt that short-term IPO performance is
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more closely related to market factors such as changes in legislation and political
structures, economic conditions and commodity prices. As such, they believed that
corporate governance variables such as board composition and ownership structure do
not influence IPO firms’ short-run performance. This belief is consistent with those
reported previously by Filatotchev and Bishop (2002) and Mak et al. (2002). In
addition, the interviewees in the Investors group reported that many retail investors in
Singapore are speculators who are sensitive to market rumours and do not place much
emphasis on corporate governance when they invest in IPOs. They maintained that if
these speculators have been allocated a fraction of the shares issued by the IPO firm,
they will quickly resell them in the market to make a gain. Such flipping activity is well
documented in academic literature (Aggarwal 2003; Bayley et al. 2006; Gounopoulos
2006). Thus, whether sound corporate governance contributes positively to IPO firms’
performance in the short-run remains a contentious issue that needs to be explored
further.
All the interviewees perceived a positive correlation between sound corporate
governance and IPO firms’ long-run performance. All the investors interviewed
reported being willing to pay a premium for IPOs that demonstrated effective corporate
governance, which they believed was instrumental in sustaining long-run performance.
This finding is in line with previous work on this issue (Felton, Hudnut & Van
Heeckeren 1996; McKinsey & Company 2002). The interviewees from the Investors
group maintained that well-governed firms should outperform poorly governed firms as
investors are aware that these firms are more committed to providing a higher equity
value via effective management and more detailed disclosures (Li 2005; Luo 2006;
Bauer et al. 2008).
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The Underwriters and Investors in the present study were asked about their views on the
performance of IPOs listed on Main Board versus those listed on the Second Board. In
line with the mixed results reported in past empirical studies (Hameed & Lim 1998;
Yong & Isa 2003; Venkatesh & Neupane 2005; Zaluki, Campbell & Goodacre 2007),
there were varying views expressed by interviewees. Many asserted that there was no
difference in performance between the two, while some felt that Main Board-listed IPOs
tend to be valued more favourably because they are larger companies and have lower
default risk. The diverse views offered by the Underwriters may be based on their
personal experiences in the market and the IPOs that their firms have underwritten,
whereas the diverse views offered by the Investors may be based on their personal
investing experiences in different companies listed in different boards.
Most interviewees believed that board characteristics such as board size, board
composition, separation of CEO and the Chairman, and director ownership play an
important role in firm performance. For instance, several interviewees expressed the
belief that a large board with a range of expertise will ensure better corporate
performance as opposed to a smaller board with limited skills (Pearce & Zahra 1992;
Goodstein, Gautum & Boeker 1994). Other interviewees felt that large boards may be
less effective in communication and coordination among directors and lead to directors
free-riding, which has also been supported by empirical studies (Lipton & Lorsch 1992;
Jensen 1993). Some interviewees felt that there may also be significant duplication of
skills and knowledge in large boards. In addition, they felt that it is more difficult to
schedule sufficiently regular board meetings that are well-attended in large boards.
These views are consistent with the argument that larger boards are perceived as
ineffective by the market because they tend to be symbolic rather than being part of the
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actual management process (Yermack 1996; Eisenberg, Sundgren & Wells 1998;
Vafeas 1999b).
Many interviewees claimed that board composition is far more important than board
size and is associated with effective corporate governance. Their claims are well
supported by empirical studies where researchers suggest that the board should be
gender-diverse (Carter, Simkins & Simpson 2003; Erhardt, Werbel & Shrader 2003; Pei
2004; Adams & Flynn 2005), include inside-outside directors (Hutchinson 2002;
Matolcsy, Stokes & Wright 2004; Van den Berghe & Baelden 2005), and constitute
experienced board members (Filatotchev & Bishop 2002). Kosnik (1990, p.138)
explicitly argued that diversity among board member backgrounds “…may promote the
airing of different perspectives and reduce the probability of complacency and narrow-
mindedness in board’s evaluation of executive proposals”. This argument is consistent
with others who have posited that the promotion of diverse perspectives can produce a
wider range of solutions and decision criteria for strategic decisions (Schweiger,
Sanberg & Rangan 1986).
Recent corporate scandals have questioned the importance of the separation of the roles
of CEO and Chairman (Mak, Sequeira & Yeo 2003; Lin 2005). However, empirical
studies have shown mixed results for role duality. Some have found that role duality
improved firm performances as the CEO has a more focused leadership role (Donaldson
& Davis 1991; Stewart 1991), while others have found that duality has no material
impact on firm performance (Baliga, Moyer & Rao 1996; Dahya, Lonie & Power 1996;
McKinsey & Company 2002). The mixed outcomes of previous empirical studies are
mirrored in the present qualitative study, although several interviewees provided
specific issues relating to the Singapore context which have not been raised by previous
169
studies. For instance, few interviewees were aware that CEO duality existed in many
IPOs, particularly among SMEs, where the founder played both the role of CEO and
Chairman. These interviewees felt that these CEOs prefer to play a dual role as they
may not be comfortable relinquishing one of these roles to another person who may
have little knowledge about their business. Another reason for the existence of CEO
duality in Singapore is that there has been a shortage of available qualified directors,
especially those with in-depth knowledge of niche industries such as agriculture,
banking, commodities, and shipping (Mak & Tan 2006). As a result, it was observed by
some interviewees that not only is CEO duality common in Singapore, but directors
holding multiple directorships in IPOs and existing listed companies has been a rising
trend in recent years (Richardson 1987; Heuvel, Gils & Voordeckers 2006; Mak & Tan
2006).
All the Underwriters asserted that IPOs which are VC-backed are more likely to exhibit
superior performance as opposed to those without any VC backing. Their views were
reported to be based on the IPOs that they have underwritten in Singapore in the past.
According to these interviewees, the VC-backed IPOs that they have previously
underwritten have demonstrated superior corporate governance structure characterised
by having more independent directors being appointed to the board, stronger internal
control systems, detailed financial reporting disclosures, and enhanced management
decisions which translated to higher equity value. The VCs lent their support to the
board members, not only in the form of financial resources, but also by providing
advice on strategic planning and effective monitoring of board members’ decisions.
These findings are in line with the monitoring role documented in the extant literature
(Barry et al. 1990; Megginson & Weiss 1991; Brav & Gompers 1997; Francis & Hason
2001; Li & Masulis 2004).
170
A few underwriters reported that IPOs that are backed by higher quality VCs would be
more appealing to them because more reputable VCs would be more competent and
have greater incentives to protect their reputations by ensuring strong corporate
governance practices. Thus, they gathered that IPOs firms backed by more reputable
VCs have greater success and superior post-IPO performance. Such views are well
supported by empirical studies conducted over the past two decades (Jain & Kini 1995;
Wang, Wang & Lu 2003; Ivanov et al. 2008).
All of the Underwriters interviewed commented on the important role of lock-up
agreements and lock-up periods on IPO performance. They saw lock-up agreements as
protecting investors’ interests by prohibiting founders and the management of IPO firms
from disposing shares during the lock-up period. They argued that the risk of having a
higher degree of underpricing will be lower when the lock-up period is longer. Such an
argument is consistent with the results of previous international research on this issue
(Mohan & Chen 2001; Wan-Hussin 2004; Arthurs et al. 2006; Goergen, Renneboog &
Khurshed 2006). However, their views cannot be compared to any Singapore IPO
studies as it appears that there are no prior Singapore IPO studies examining
underpricing and lock-up period.
When asked about their views on the CGI, most interviewees agreed that equal
weightage should be assigned to each section and also each of the current 60 items. The
main reason cited was that all the items and sections were important measures of the
quality of IPO firms’ corporate governance practices. The items can serve as a checklist
for investors and analysts in ascertaining the extent of compliance to the Code.
171
Although many of the interviewees felt that the items are relatively comprehensive,
some noted that items such as the frequency and number of board meetings, and having
annual reports published on websites, may not be applicable to IPO firms. This was
attributed to the fact that many IPOs may have not formed a proper board with a good
mix of inside-outside directors, and thus no formal meetings have been held prior to
listing. This was considered to be especially prevalent in family-run businesses, where
family members run the company and promote ‘self-accountability’. As a result, they
may be reluctant to publish the company’s annual report on the website to disclose the
company’s financial performance to outsiders.
Several interviewees offered constructive suggestions for additional items such as
disclosure of family-linked relationships among directors, related or interested party
transactions, and succession planning. Disclosure of a family-linked relationship was
perceived as being useful to illustrate more commitment among the directors in running
a business, especially when they are family-linked and hold substantial interest in the
company. In a similar vein, disclosure of interested party transactions would be useful,
especially for transactions entered between family-linked directors and the company in
which they have substantial shareholdings, and transactions between a holding company
and its affiliated companies. Some interviewees expressed concerned over this, noting
that one of the main reasons for corporate fraud was due to inadequate disclosure of
related party transactions. Further, disclosure of succession planning would enable
investors to assess the management’s long-term commitment to ensure there are plans
for continuity of operations with minimal disruptions to the firm’s vision and objectives.
In view of the comments provided by the interviewees, eight items from the original 60-
item CGI were dropped as they may not be applicable to Singapore IPOs. Four of the
172
eight items were related to attendance and frequency of board meetings found under the
Board’s Conduct of Affairs section. A further item in the Internal Audit, Internal
Control and Risk Management section related to the adequacy of internal controls
(stated in the annual report) was removed as IPO firms do not provide annual reports
publicly prior to IPO. In a similar vein, the last three items found under the
Communication with Shareholders section were also deleted as it would be impractical
to establish whether there was a website that dealt with investor relations at the point of
listing as all of the IPOs incorporated in this study were listed between 2000 and 2007.
As a result of the change, the entire Communication with Shareholders section was
withdrawn (refer to Appendix 2).
The revised CGI (refer to Appendix 3) is comprised of a total of 55 items covered under
eight sections, as opposed to the original CGI (refer to Appendix 2) that had 60 items in
nine sections. Three new items were introduced in the revised CGI based on the
feedback given by the interviewees: family-linked relationships among directors/senior
management (Board Size and Board Composition), succession planning of directors
(Remuneration and Executive Resource Matters), and related party transactions
(Internal Audit, Internal Control and Risk Management). The findings suggest that
these three items may be of concern to prospective investors of IPOs.
173
6.4 Summary
This chapter presented practitioners’ views on the role of corporate governance on IPO
firms’ short-run and long-run performances. Interviewees from the Issuers group shared
their views on the reasons for going public and the challenges they faced after the IPO.
The bankers and underwriters in the Underwriters group gave their professional views
pertaining to areas such as perceived variations in performance between Main Board
listing and Second Board listing IPOs, underwriters’ reputations and IPO firms’
performance, the role of VCs and the impact of lock-up periods on IPO firms’
performance. The investors interviewed provided their practical views on the
importance of corporate governance to their investment decisions. They also shared
their views on the relationship between board characteristics and IPO firms’
performance in the short- and long- run.
Most of the interviewees offered constructive comments relating to the CGI and their
views were taken into consideration when revising the CGI. As a result, the revised
CGI, comprised of 55 items instead of the 60 items in the original CGI, was then
employed as one of the quantitative tools to measure IPO firms’ performance. The
following chapter presents the empirical results of the IPO performance analysis.
174
175
Chapter 7
IPO Performance and Governance: Data Description and Empirical
Findings
7.1 Introduction
The previous chapter provided findings on the views of three major groups of
practitioners (issuers, underwriters and investors) on the role of corporate governance
on IPO firms’ performance. They also provided constructive suggestions on how the
Corporate Governance Index (CGI) can be improved and these suggestions were
incorporated in the quantitative phase of this study.
This chapter presents the empirical findings on the relationship between the importance
of corporate governance on IPO firms’ short-run and long-run performance. Section 7.2
provides a summary of the extent of disclosure on each item of corporate governance
which form part of the CGI. In addition, it presents a comparative analysis between
IPOs listed on Main Board and those listed on SESDAQ, across ten industries. Section
7.3 presents the descriptive statistics relating to the initial returns and long-run
performance of the sample IPOs. Sections 7.4 and 7.5 present the univariate and
multivariate analyses of corporate governance practices and IPO underpricing and long-
run performance, respectively. Section 7.6 summarises the findings reported in this
chapter.
7.2 Descriptive Statistics of CGI
7.2.1 Overall disclosure
Table 7.1 summarises the mean disclosure levels among the sampled IPOs – those listed
between 2000 and 2007 using all the 55 items that form the CGI. To facilitate a
176
comparison, the percentage levels of disclosure for the pooled sample and each of the
eight listing years are reported.
Two significant findings can be seen from Table 7.1. Firstly, there are significant
variations in the levels of disclosure for each item among the sampled IPOs, which
ranges from 100% (disclosure by all 391 IPOs over the eight-year period) to none for
some items.
The 100% disclosure is observed for the following items:
• disclosure of complete list of board members (6);
• educational and professional qualification of directors (17);
• working experience of directors (18);
• current directorships (19);
• past directorships for the past three years (20);
• audit committee (44); and
• disclosure of related party transactions (55).
Complete non-disclosure by any of the IPOs over the eight-year period was observed
for the following items:
• details of training provided to directors (3);
• process of appointment of new director (21);
• board performance criteria (23);
• individual director performance appraisal criteria (25);
• succession planning (43);
• company has Code of Ethics (53); and
• company has whistle blowing policy (54).
177
Items (55) and (43) are two of the three items recommended by the practitioners
covered in Chapter 6. It is noted that item (55) has a 100% disclosure among all the
sampled IPOs whereas item (43) recorded a zero level of disclosure. The third
recommended item (8) ‘disclosure of family linked relationship among directors’ has an
overall 49% disclosure.
The fact that all companies chose to disclose the seven items mentioned earlier could
reflect their awareness of investors’ concerns about board membership and influence,
including directors’ qualifications and prior work and board experience. These firms
may be aware that investors consider that the financial success of the firm after listing
depends largely on the competence of the board of directors. In addition, these firms
believe that the investors would like to know more about the commitment of the
independent directors to the newly listed firm via the number of directorships they
currently hold. Further, the firm’s Audit Committee plays a critical role in monitoring
and reporting the firm’s internal audit and control, financial reporting, and risk
management to the shareholders. It is thus vital to provide full disclosure on the
existence of the Audit Committee and its members. For related parties and transactions
among them, SGX requires full disclosure by any company going for listing in
Singapore, and it is not surprising that no IPO in the sample has violated the mandatory
disclosure imposed by SGX.
The non-disclosure of the seven items mentioned above reflects the fact that Singapore
adopts the ‘comply or explain’ model employed by the UK. More importantly, as the
issuers are just preparing for initial listing, it is possible that they perceived areas such
as board and individual director performance appraisal, and succession planning as
premature at the time of listing. However, it is surprising that no firm chose to disclose
178
the process for the appointment of new directors. Possible explanations for this non-
disclosure include that the directors are existing members of the board before listing and
will continue to be appointed as directors after listing, and that they are relatively small
firms, possibly avoiding the costs of a tedious process of recruiting new directors.
It is noted that approximately 90% of the sampled IPOs provide disclosure for 14 items.
They include directors classified as independent; date of appointment of independent
director; disclosure of the Chairman of Nomination Committee (NC) members and
names of independent directors of NC; disclosure of the Chairman of Remuneration
Committee (RC) members, and names of independent directors of RC; whether
remuneration of executive directors is linked to performance; whether the vesting period
of share options is more than one year; disclosure of names of directors in each
remuneration band; whether the Chairman of the AC is independent; internal control
and risk management; and whether the internal auditor reports to the Chairman of the
AC.
On the other hand, 11 items reported a relatively low compliance and disclosure with no
more than 40% of the sampled IPOs reporting these items. These items include
information about training provided to directors, ownership by directors and their
remuneration arrangements. Low compliance and disclosure could be attributable to
cost and that many issuers have yet to set-up proper remuneration policies and
performance criteria for their directors. It is also possible that companies that are family
controlled may feel that such disclosures are not required.
179
Table 7.1: Summary of disclosure of CGI items among firms
CGI Items Disclosure Among Firms (%)
All 2000 2001 2002 2003 2004 2005 2006 2007
(I) 1 2 3
(II) 4 5 6 7 8
(III) 9
10 11
(IV) 12 13 14 15 16 17 18 19 20 21
(V) 22 23 24 25
(VI) 26 27 28
Board's Conduct of Affairs Formal orientation program Training for law & regulation Details of training disclosed Board Size and Board Composition Independent directors (ID): 1/3 of board Independent directors (ID): 1/2 of board Complete list of board member disclosed Directors classified as independent Family linked relationship Chairman and CEO CEO is not the chairman Chairman not an Executive Director Chairman not related to others Board Membership Date of Appointment of independent director Nominating committee (NC) Chairman of NC is independent Members of NC disclosed Names of ID in NC disclosed Educational/professional qualification Working experience Current directorships Past directorships (3yrs) Process of appointment of new member Board performance Formal appraisal board performance Board performance criteria disclosed Individual director performance appraisal Individual director performance appraisal criteria disclosed Remuneration and Executive Resource Matters Remuneration Committee (RC) Chairman of RC is independent Members of RC disclosed
1 8 0
84 20
100 95 49
56 47 58
93 72 96
100 99
100 100 100 100
0
63 0
72 0
78 94 98
0 0 0
52 9
100 68 55
41 54 44
76 2
100 100 100
98 100 100 100
0
0 0 0 0
19 63 67
0 0 0
72 13
100 100
31
41 33 67
88 0 0 0 0
100 100 100 100
0
3 0 3 0
25 88
100
4 0 0
85 15
100 100
45
37 39 58
96 50 85
100 100 100 100 100 100
0
38 0
46 0
65 76
100
2 2 0
98 29
100 100
45
37 39 58
92
100 94
100 98
100 100 100 100
0
94 0
98 0
100
96 100
3 4 0
91 25
100 99 50
57 44 65
96
100 97
100 97
100 100 100 100
0
85 0
100 0
100
96 99
0 9 0
89 25
100 100
42
70 44 64
98
100 98 98 98
100 100 100 100
0
82 0
100 0
100
95 100
0
16 0
93 11
100 100
53
71 48 59
100 100
96 100 100 100 100 100 100
0
93 0
100 0
100
98 100
2
26 0
96 28
100 100
54
68 46 58
98 98 98
100 100 100 100 100 100
0
82 0
100 0
98 98
100
180
Continuation: Table 7.1
CGI Items Disclosure Among Firms (%)
All 2000 2001 2002 2003 2004 2005 2006 2007
(VI) 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43
(VII) 44 45 46 47 48 49
(VIII) 50 51 52 53 54
55
Remuneration and Executive Resource Matters (continued) Names of ID in RC disclosed Process used to determination remuneration Remuneration of ED linked to performance Range of performance-related remuneration ED remuneration includes long term incentive NED remuneration link to level of contribution & responsibilities All executive directors own shares Shares options offered to directors NED not receiving share options Vesting period more than one year Vesting of shares/options subject to performance conditions Total fees and remuneration of each individual director disclosed Individual component of remuneration disclosed Names of directors in each band disclosed Succession planning disclosed Accountability and Audit Audit Committee (AC) Chairman of AC is independent Entire AC is independent AC chairman have accounting/finance expertise Members of AC have accounting/finance expertise Frequency of AC meetings Internal Audit, Internal Control and Risk Management Internal control and risk management disclosed Internal auditor report to Chairman of AC Company has internal audit function Company has Code of ethics Company has whistle blowing policy Disclosure of related party transactions
97 0
90 69 54 33 37 51 21 92 6
82 8
97 0
100
98 32 75 56 14
98 12 99 0 0
100
70 0
86 64 34 9
34 34 48 95 4
67 11 92 0
100
92 2
56 28 9
95 3
89 0 0
100
100
0 91 78 63 19 56 63 25 94 0
88 6
97 0
100 100
6 72 47 6
97 9
100 0 0
100
94 0
100 81 73 23 81 65 18
100 0
92 15 96 0
100
96 27 69 58 19
100
19 100
0 0
100
94 0
100 78 65 41 49 67 21 97 0
92 8
96 0
100 100
37 71 53 8
100
14 100
0 0
100
96 0
85 66 62 50 35 59 15 97 3
84 0
99 0
100
99 33 82 62 13
100
7 100
0 0
100
100
0 88 70 56 39 26 56 19
100 13 95 12
100 0
100 100
44 77 68 16
96 14
100 0 0
100
100
0 82 56 38
100 22 38 6
93 20 71 4
100 0
100
98 47 87 64 9
100
18 100
0 0
100
100
2 98 66 54
100 22 36 17 50 11 76 14
100 0
100 100
58 82 72 28
96 20
100 0 0
100
181
In sum, the evidence gathered from Table 7.1 shows that the sampled IPOs are more
likely to comply with some of the corporate governance best practices than others. For
instance, 98% of the sampled IPOs disclosed their internal control and risk management
matters, but only 12% had an internal audit function. In addition, only 56% of the
sampled IPOs have split roles between the CEO and Chairman, and 75% of the AC
Chairmen possess accounting/finance knowledge.
The second major finding from Table 7.1 is that the disclosure of items improves over
time. Essentially, apart from the seven items with 0% disclosure and another seven
items with 100% disclosure over the eight-year period, 34 out of the 55 items recorded
an improvement in the disclosure level between 2000 and 2007. Two items maintained
the percentage of disclosure in the same period. Six out of the 34 items showed a
substantial increase: Nominating Committee (13) (from 2% in 2000 to 98% in 2007);
formal appraisal board performance (22) (from 0% in 2000 to 82% in 2007); individual
director performance appraisal (24) (from 0% in 2000 to 100% in 2007); Remuneration
Committee (26) (from 19% in 2000 to 98% in 2007); NED remuneration linked to level
of contribution and responsibilities (34) (from 9% in 2000 to 100% in 2007); and
whether the entire AC membership is independent (46) (from 2% in 2000 to 58% in
2007). In contrast, only five of the 55 items recorded a reduction in disclosure
percentage, with most showing only marginal decreases.
Panel A of Table 7.2 presents a comparison on the year-on-year average levels of
disclosure of the CGI across the sampled IPOs. It shows that on the whole, disclosure of
the CGI items among the sampled IPOs improves over time. In addition, it shows a
percentage point increase from 42.39% in 2002 to 64.1% in 2007 (an increase of almost
22%). A closer observation of the mean percentage reveals that the increase from 2000
182
to 2002 is relatively small, which averages at about a five percent increase per year (i.e.
from 42.39% in 2000 to 47.38%, and 52.27% in 2001 and 2002). However, the
percentage exceeded 60% in 2003 for the first time, which is likely to be mainly due to
the introduction of the Code by SGX for all listed companies in 2003. Thereafter, the
percentage increase stabilised to one to two percent per year. The Code was revised and
adopted by SGX in 2007, and the average disclosure percentage for the sampled IPOs in
2007 was 64%, the highest over the eight-year sample listing period.
Such a positive relationship between the level of disclosure and time is consistent with
prior studies conducted in Australia (Cui, Evans & Wright 2008; Henry 2008), Europe
(Bauer, Guenster & Otten 2004; Martynova & Renneboog 2010), Hong Kong (Cheung
et al. 2007), South Africa (Ntim, Opong & Danbolt 2010), the UK (Conyon 1994;
Conyon & Mallin 1997; Shabbir & Padgett 2005; Luo 2006), and the US (Epps &
Cereola 2008; Martynova & Renneboog 2010).
Table 7.2 presents summary descriptive statistics of the CGI by overall sample, listing
board and industries over the sample listing period. In line with the evidence of a wide
variability in disclosure levels with the individual CGI item, there is a significant degree
of dispersion in the summary CGI scores among the sampled IPOs. Consistent with
earlier observations, Panel A shows that the mean, minimum and maximum scores have
improved over the years. The scores range from a minimum of 29% in 2000 to a
maximum of 72% in 2007, and the average sampled IPO scoring improved from
42.39% in 2000 to 64.1% in 2007, with an overall mean disclosure of 57.76%. This
mean score is fairly close to the mean compliance of 59.05% reported by Durnev and
Kim (2005), based on a relatively small sample of 43 listed companies in Singapore in
1999. The mean score is relatively lower (65.34%) than the study conducted by Klapper
183
and Love (2004) but higher than the mean score (45%) reported by Aggarwal et al.
(2007). However, it must be noted that the sample size employed by Klapper and Love
(2004) and Aggarwal et al. (2007) are relatively small, only 43 and 38 SGX-listed
companies in 2001 and 2005, respectively. In addition, all three studies do not analyse
the change in the disclosure level over the years.
In terms of skewness, Panel A shows the overall score of -0.96 which rejects the null
hypothesis (the critical value for accepting skewness is zero) that the CGI score is
symmetrically distributed as it shows the distribution is skewed to the left. Similarly, the
kurtosis statistic (-0.10) rejects the null hypothesis (the absolute critical value for
accepting Kurtosis is three) that the CGI score is mesokurtically distributed. The
negative sign suggests that the observations cluster less and have shorter tails, indicating
a platykurtic distribution.
184
Table 7.2: Summary Descriptive Statistics for CGI Scores
Mean
Standard
Deviation
Minimum
Maximum
Skewness
Kurtosis
Panel A: All Firm Years 2000 2001 2002 2003 2004 2005 2006 2007 Panel B: Main Board 2000 2001 2002 2003 2004 2005 2006 2007 Panel C: SESDAQ 2000 2001 2002 2003 2004 2005 2006 2007 Panel D: Commerce 2000 2001 2002 2003 2004 2005 2006 2007 Panel E: Construction 2000 2001 2002 2003 2004 2005 2006 2007 Panel F: Finance 2000 2001 2002 2003 2004 2005 2006 2007
57.80 42.39 47.38 57.27 62.39 61.90 62.96 62.36 64.10 57.51 42.45 46.43 56.56 61.59 61.91 62.77 61.97 63.93 57.38 42.24 48.11 58.88 63.36 61.88 63.39 63.70 65.14 57.08 43.81 50.25 56.80 61.14 62.54 62.71 64.00 67.80 52.00 44.40 46.00
- - -
61.50 - -
58.25 - - - - - - -
65.00
9.35 5.62 6.05 7.04 4.15 4.37 4.51 3.70 3.55 9.36 5.85 6.98 6.31 4.45 4.25 4.95 3.69 3.30 9.37 5.11 5.31 8.72 3.61 4.66 3.45 3.59 5.01 9.85 5.78 7.04 6.14 5.43 4.81 3.99 3.65 3.42
10.28 2.19 1.41
- - -
0.71 - -
18.63 - - - - - - -
4.24
29 29 34 40 53 52 53 56 55 29 29 34 40 53 54 53 56 55 32 32 39 48 57 52 58 56 57 34 34 40 48 53 54 56 58 64 43 43 45 - - -
61 - -
31 - - - - - - -
62
73 53 58 71 71 72 72 69 73 72 53 56 66 71 72 72 69 70 73 48 58 71 70 69 70 68 73 73 53 56 63 67 69 69 69 73 70 48 47 - - -
62 - -
72 - - - - - - -
68
-0.96 -0.39 0.06 -0.13 0.03 -0.10 -0.21 -0.17 -0.08 -1.03 -0.33 0.02 -0.78 0.20 0.23 -0.22 0.01 -0.28 -0.81 -0.74 0.46 0.21 0.10 -0.57 0.34 -0.99 -0.02 -0.68 0.04 -1.64 -0.78 -0.50 -0.42 -0.17 -0.37 0.84 0.75 1.53 0.00
- - -
0.00 - -
-1.72 - - - - - - -
0.00
0.10 -0.16 -0.57 0.32 -0.62 -0.57 -0.34 -0.85 0.21 0.30 -0.08 -0.94 1.37 -0.71 -0.55 -0.57 -0.83 -0.07 -0.30 -0.63 -0.48 -1.25 -0.41 -0.53 -0.61 1.13 0.84 -0.56 -0.97 3.04 -1.06 -1.61 -0.89 1.30 -0.06 0.70 -1.28 1.74 0.00
- - -
0.00 - -
3.02 - - - - - - -
0.00
185
Continuation: Table 7.2
Mean
Standard
Deviation
Minimum
Maximum
Skewness
Kurtosis
Panel G: Hotels/Restaurants 2000 2001 2002 2003 2004 2005 2006 2007 Panel H: Manufacturing 2000 2001 2002 2003 2004 2005 2006 2007 Panel I: Multi-industry 2000 2001 2002 2003 2004 2005 2006 2007 Panel J: Properties 2000 2001 2002 2003 2004 2005 2006 2007 Panel K: Services 2000 2001 2002 2003 2004 2005 2006 2007 Panel F: Transport/Storage/
Communication 2000 2001 2002 2003 2004 2005 2006 2007
52.67 -
41.00 - - - - - -
57.82 40.74 45.20 57.56 61.89 60.94 62.63 61.30 63.50 56.00
- - - - - - - -
62.20 - - - - -
66.50 62.75 66.00 58.63 44.00 51.38 56.40 64.09 62.67 63.63 65.57 65.86
57.69 37.00
- -
63.50 63.00 61.67
- 58.67
11.50 -
2.83 - - - - - -
9.04 5.56 5.52 5.75 3.54 4.22 4.93 3.64 2.90 0.00
- - - - - - - -
7.22 - - - - -
4.95 1.50 1.41 9.15 5.57 5.50 8.40 4.95 3.60 3.83 1.99 3.24
9.61 2.83
- -
4.95 5.03 7.77
- 4.73
39 -
39 - - - - - -
29 29 34 51 56 52 54 56 59 56 - - - - - - - -
43 - - - - -
63 61 65 32 32 44 40 57 56 54 64 62
35 35 - -
60 56 53 -
55
64 -
43 - - - - - -
72 50 56 66 68 69 72 68 69 56 - - - - - - - -
70 - - - - -
70 64 67 71 52 58 71 71 68 70 68 70
68 39 - -
67 68 68 -
64
-0.11 -
0.00 - - - - - -
-1.18 -0.67 0.15 0.31 0.13 -0.09 0.13 0.27 0.13 0.00
- - - - - - - -
-2.38 - - - - -
0.00 -0.37 0.00 -0.91 -0.58 0.00 -0.32 0.08 -0.31 -0.81 0.48 0.39
-1.24 0.00
- -
0.00 -1.13 -1.23
- 1.39
-2.95
- 0.00
- - - - - -
0.75 -0.08 0.62 -1.47 -1.16 -0.55 -0.81 -0.90 -1.01 0.00
- - - - - - - -
6.90 - - - - -
0.00 -3.90 0.00 0.01 -0.02 -1.55 1.07 -1.39 -0.62 1.76 2.47 -1.61
1.25 0.00
- -
0.00 2.23 0.00
- 0.00
186
Continuation: Table 7.2
Mean
Standard
Deviation
Minimum
Maximum
Skewness
Kurtosis
Panel M:Others 2000 2001 2002 2003 2004 2005 2006 2007
59.00 - - - - - - - -
5.03 - - - - - - - -
52 - - - - - - - -
64 - - - - - - - -
-1.13 - - - - - - - -
2.23 - - - - - - - -
Table 7.3 indicates the distribution of the CGI scores, which is fairly less non-normal
compared to a normal distribution. Specifically, it shows that no IPO firm has scored
less than 20%. Similarly, no IPO firm has scored more than 80%. More than 30% of the
sampled IPOs recorded CGI scores between 41% and 50%, and 48% between 51% and
60%.
187
Table 7.3: Tabular Distribution of the CGI Scores
Range (%)
Number of Observations
% of Sample
0 – 10
11 – 20
21 – 30
31 – 40
41 – 50
51 – 60
61 – 70
71 – 80
81 – 90
91 – 100
0
0
2
22
58
118
186
5
0
0
0.00
0.00
0.51
5.63
14.83
30.18
47.57
1.28
0.00
0.00
Total
391
100.0
Descriptive statistics of the CGI scores for each of the eight listing years are fairly
similar to those reported for the full 391 IPOs observations, though there are some
differences in the range of the scores before and after 2003, the year when the Code was
first introduced. Specifically, the variation of the CGI scores in the later years became
smaller, which could be attributable to more compliance among IPOs listed in the later
years after the Code was introduced in 2003, and later revised in 2007. In contrast, the
variability is relatively higher prior to 2003 as the Code was yet to be introduced. The
gap between the minimum and maximum scores before and after 2003 also suggests
that the compliance level increased from 2003. Similarly, they are all mildly skewed to
the left and display a platykurtic distribution.
188
In sum, it can be concluded that the level of disclosure has improved over the years, in
particular from 2003 onwards, which could be attributable to the adoption of the Code
by SGX in 2003. However, internal corporate governance standards among IPOs during
the sample listing years still vary considerably. While this is fairly consistent with the
variability in compliance levels gathered by prior cross-country studies that include
Singapore (Klapper & Love 2004; Durnev and Kim 2005; Aggarwal et al. 2007), the
results of the present study are more conclusive for three reasons. Firstly, the sample
size selected is much larger than the three prior studies conducted. Secondly, this study
covers a longer period which includes years prior to the introduction of the Code in
2003 (from 2000 to 2002), and also the years after the Code was introduced (from 2003
to 2006) and revised (2007). Thirdly, this study provides further analysis by including
coverage of two listing boards and ten industry groupings to be discussed in sections 7.2
and 7.3, respectively.
In line with the prior accounting disclosure literature (Lang & Lundholm 1993; Botosan
1997; Healy & Palepu 2001) and earlier corporate governance studies (Bauer, Guenster
& Otten 2004; Drobetz, Schillhofer & Zimmerman 2004; Bebenroth 2005; Werder,
Tataulicar & Kolat 2005; Bauet, Otten & Tourani-Rad 2008; Ntim, Opong & Danbolt
2010; Kowalewski 2012), the full sample was split into sub-samples on the basis of firm
size and industry. However, none of the studies examine IPOs listed on different board
listings. Therefore, it was of interest to examine whether the observed wide variability
in the levels of disclosure of corporate governance provisions among the sampled IPOs
can be explained by board listing and industry. The next two sub-sections will cover the
descriptive statistics of the CGI based on board listing and industry.
189
7.2.2 Disclosure based on board listing
Panels B and C of Table 7.2 present summary descriptive statistics on the aggregate
level of disclosure of the CGI for IPOs listed on the Main Board and SESDAQ. Three
major observations can be made from the two panels.
Firstly, the overall mean score between the Main Board and SESDAQ is largely similar
(57.51% vs. 57.38%). A closer observation of the mean score over the years between
the Main Board and SESDAQ reveals that SESDAQ-listed IPOs have a similar, if not
marginally higher, mean score than their counterparts listed on the Main Board in most
of the sample listing years. Main Board-listed IPOs have a lower minimum and
maximum score than SESDAQ-listed IPOs (29 vs.32 and 72 vs. 73), albeit the
difference is marginal. There is no significant difference between IPOs listed on the
Main Board and those listed on the SESDAQ when it comes to disclosure of corporate
governance practices. This result can be explained by the fact that the Code, both the
original and the revised versions, do not provide any exemptions or differentiation for
firms going for listing on the Main Board or the SESDAQ. In addition, when it comes
to corporate governance disclosures, issuers may see other factors such as investors’
needs, compliance with SGX listing rules, underwriters’ advice, and the ‘comply or
explain’ approach used by the Code as more critical than which board listing will be
floated on SGX.
Secondly, in line with the observations made for the whole sample, disclosure levels in
both Main Board and SESDAQ listings have improved over time. For instance, the
disclosure level for Main Board-listed IPOs has improved from 42.45% in 2000 to
61.59% and 63.93% in 2003 (when the Code was first introduced) and 2007 (when the
Code was revised and adopted by SGX), respectively. Similarly, SESDAQ-listed IPOs
190
have also improved the disclosure level from 42.24% in 2000 to 63.36% and 65.14% in
2003 and 2007, respectively. Therefore, these observations provide additional evidence
that the introduction of the Code improved the disclosure level substantially since 2003,
albeit further improvements were made in 2007 when the Code was revised and further
adopted by SGX.
Finally, Table 7.2 suggests that both Main Board and SESDAQ-listed IPOs show a
similar level of adoption to those gathered for the overall sample. Essentially, it
suggests that some aspects of the disclosures are either mildly skewed to the right or left
in comparison to a normal distribution. The mild non-normal level of adoption of the
CGI is in line with prior studies conducted by Cheung and Wei (2006), Haniffa and
Hudaib (2006), Francoeur, Labelle & Sinclair-Desgagné (2008), and Ntim (2009).
Table 7.4 presents a comparison of the disclosure levels with all the 55 items in the CGI
for both Main Board and SESDAQ-listed IPOs over the sample listing periods. Two
interesting observations emerge from this Table. Firstly, it shows that the differences in
disclosure levels observed between Main Board and SESDAQ-listed IPOs can be
explained more by some items that others. Apart from the seven items that have 100%
disclosure and another seven items that show 0% disclosure (covered in section 7.2.1),
there are 17 items for which Main Board-listed IPOs show a higher percentage of
disclosure. Among these 17 items, there are five items that show differences between
the Main Board and SESDAQ-listed IPOs of more than five percentage points. These
are: CEO is not the Chairman (9); Chairman is not related to other directors (11);
Remuneration Committee (26); entire AC is independent (46); and company has
internal audit function (51). The greater variability in these five items may suggest that
Main Board-listed companies are generally larger and may have the financial resources
191
and wider networking to appoint a different and independent director to chair the board,
recruit additional independent AC members, and set up a stronger internal audit
function.
There are 20 items for which SESDAQ-listed IPOs have a higher percentage disclosure
than Main Board-listed IPOs. Among them, there are seven items that show SESDAQ-
listed IPOs perform better than Main Board-listed IPOs by more than five percentage
points. These are: (10) Chairman is not an Executive Director (ED); (31) remuneration
of ED is linked to performance; (32) range of performance-related remuneration; (35)
all EDs own shares; (38) vesting period of share options is more than one year; (40)
disclosure of total fees and remuneration of each director; and (63) members of AC
have accounting/finance expertise. Possible reasons for the greater variability for some
of these items could be that SESDAQ-listed IPOs are generally smaller in size and
scale, and many of these issuers have to offer shares and share options to motivate the
ED to perform well and their remuneration could be more likely linked to performance.
Due to the smaller size, these SESDAQ-listed IPOs may have weaker internal audit
function (as evidenced by the earlier discussion) and are more likely to recruit AC
members who possess accounting/finance expertise to ensure the firm complies with the
various regulations imposed by the SGX, the tax authority, and accountancy bodies on
financial reporting and disclosure matters.
192
Table 7.4: Summary of disclosure of CGI items - Main Board vs. SESDAQ
CGI Items
Disclosure Among Firms (%)
All 2000 20001 2002 2003
Main SESDAQ Main SESDAQ Main SESDAQ Main SESDAQ Main SESDAQ
(I) 1 2 3
(II) 4 5 6 7 8
(III) 9
10 11
(IV) 12 13 14 15 16 17 18 19 20 21
(V) 22 23 24 25
Board's Conduct of Affairs Formal orientation program Training for law & regulation Details of training disclosed Board Size and Board Composition Independent directors (ID): 1/3 of board Independent directors (ID): 1/2 of board Complete list of board member disclosed Directors classified as independent Family linked relationship Chairman and CEO CEO is not the chairman Chairman not an Executive Director Chairman not related to others Board Membership Date of Appointment of independent director Nominating committee (NC) Chairman of NC is independent Members of NC disclosed Names of ID in NC disclosed Educational/professional qualification Working experience Current directorships Past directorships (3yrs) Process of appointment of new member Board performance Formal appraisal board performance Board performance criteria disclosed Individual director performance appraisal Individual director performance appraisal criteria disclosed
2 7 0
84 22
100 94 48
59 45 61
92 73 97 99 99
100 100 100 100
0
62 0
73 0
0 8 0
85 17
100 97 50
50 52 49
94 70 93
100 98
100 100 100 100
0
65 0
70 0
0 0 0
49 13
100 65 47
40 59 54
71 2
100 100 100 100 100 100 100
0
0 0 0 0
0 0 0
59 0
100 76 76
41 44 19
88 0 0 0 0
100 100 100 100
0
0 0 0 0
0 0 0
50 14
100 100
36
57 25 75
86 0 0 0 0
100 100 100 100
0
0 0 0 0
0 0 0
89 11
100 100
28
28 42 58
89 0 0 0 0
100 100 100 100
0
6 0 6 0
6 0 0
78 17
100 100
50
72 65 65
94 44 88
100 100 100 100 100 100
0
28 0
39 0
0 0 0
100
13 100 100
75
38 67 0
100
63 80
100 100 100 100 100 100
0
63 0
63 0
4 4 0
100
30 100 100
56
33 25 55
89
100 96
100 96
100 100 100 100
0
96 0
96 0
0 0 0
95 27
100 100
32
41 64 64
95
100 91
100 100 100 100 100 100
0
91 0
100 0
193
Continuation: Table 7.4
CGI Items
Disclosure Among Firms (%)
All 2000 20001 2002 2003
Main SESDAQ Main SESDAQ Main SESDAQ Main SESDAQ Main SESDAQ
(VI) 26 27 28 29 30 31 32 33 34
35 36 37 38 39
40
41 42 43
(VII) 44 45 46 47 48 49
Remuneration and Executive Resource Matters Remuneration Committee (RC) Chairman of RC is independent Members of RC disclosed Names of ID in RC disclosed Process used to determination remuneration Remuneration of ED linked to performance Range of performance-related remuneration ED remuneration includes long term incentive NED remuneration link to level of contribution & responsibilities All executive directors own shares Shares options offered to directors NED not receiving share options Vesting period more than one year Vesting of shares/options subject to performance conditions Total fees and remuneration of each individual director disclosed Individual component of remuneration disclosed Names of directors in each band disclosed Succession planning disclosed Accountability and Audit Audit Committee (AC) Chairman of AC is independent Entire AC is independent AC chairman have accounting/finance expertise Members of AC have accounting/finance expertise Frequency of AC meetings
81 94 98 96 0
88 63 54 34
30 50 20 90 7
79
8
98 0
100
98 36 75 53 14
72 94
100 98 0
94 80 54 32
53 52 23 97 3
88
10 97 0
100
98 24 74 63 13
26 63 67 70 0
83 57 40 13
30 40 40 94 5
64
13 89 0
100
91 2
51 28 9
0 0 0 0 0
94 82 18 0
47 18
100 100
0
76
6 100
0
100 94 0
71 29 12
36 80
100 100
0 86 71 50 21
36 50 29 86 0
93
7
93 0
100 100
0 71 43 7
17
100 100 100
0 94 83 72 17
72 72 23
100 0
83
6
100 0
100 100
11 72 50 6
67 75
100 92 0
100 72 78 28
78 72 8
100 0
89
6
100 0
100
94 22 67 56 17
63 80
100 100
0 100 100
63 13
88 50 50
100 0
100
38 88 0
100 100
38 75 63 25
100
96 100
93 0
100 74 70 41
37 70 21
100 0
85
4
100 0
100 100
37 67 41 7
100
95 100
95 0
100 82 59 41
64 64 21 92 0
100
14 91 0
100 100
36 77 68 9
194
Continuation: Table 7.4
CGI Items
Disclosure Among Firms (%)
All 2000 20001 2002 2003
Main SESDAQ Main SESDAQ Main SESDAQ Main SESDAQ Main SESDAQ
(VIII)
50 51 52 53 54
55
Internal Audit, Internal Control and Risk Management Internal control and risk management disclosed Internal auditor report to Chairman of AC Company has internal audit function Company has Code of ethics Company has whistle blowing policy Disclosure of related party transactions
98 14 99 0 0
100
98 8
100 0 0
100
98 4
88 0 0
100
88 0
100 0 0
100
93 14
100 0 0
100
100 6
100 0 0
100
100 28
100 0 0
100
100 0 0 0 0
100
100 11
100 0 0
100
100 18
100 0 0
100
195
Continuation: Table 7.4
CGI Items
Disclosure Among Firms (%)
2004 20005 2006 2007
Main SESDAQ Main SESDAQ Main SESDAQ Main SESDAQ
(I) 1 2 3
(II) 4 5 6 7 8
(III) 9
10 11
(IV) 12 13 14 15 16 17 18 19 20 21
(V) 22 23 24 25
Board's Conduct of Affairs Formal orientation program Training for law & regulation Details of training disclosed Board Size and Board Composition Independent directors (ID): 1/3 of board Independent directors (ID): 1/2 of board Complete list of board member disclosed Directors classified as independent Family linked relationship Chairman and CEO CEO is not the chairman Chairman not an executive director Chairman not related to others Board Membership Date of Appointment of independent director Nominating committee (NC) Chairman of NC is independent Members of NC disclosed Names of ID in NC disclosed Educational/professional qualification Working experience Current directorships Past directorship (3yrs) Process of appointment of new member Board performance Formal appraisal board performance Board performance criteria disclosed Individual director performance appraisal Individual director performance appraisal criteria disclosed
5 5 0
95 31
100 98 42
60 37 71
98
100 100 100
98 100 100 100 100
0
81 0
100 0
0 4 0
84 16
100 100
64
52 58 53
92
100 92
100 96
100 100 100 100
0
92 0
100 0
0
10 0
92 23
100 100
46
74 47 62
97
100 97 97
100 100 100 100 100
0
79 0
100 0
0 6 0
83 28
100 100
33
61 38 69
100 100 100 100
94 100 100 100 100
0
89 0
100 0
0 9 0
97 11
100 100
51
66 41 56
100 100
94 100 100 100 100 100 100
0
91 0
100 0
0
40 0
80 10
100 100
60
90 70 70
100 100 100 100 100 100 100 100 100
0
100 0
100 0
2
21 0
95 28
100 100
53
67 47 60
98 98
100 100 100 100 100 100 100
0
81 0
100 0
0
57 0
100
29 100 100
57
71 43 43
100 100
86 100 100 100 100 100 100
0
86 0
100 0
196
Continuation: Table 7.4
CGI Items
Disclosure Among Firms (%)
2004 20005 2006 2007
Main SESDAQ Main SESDAQ Main SESDAQ Main SESDAQ
(VI) 26 27 28 29 30 31 32 33 34
35 36 37 38 39
40
41 42 43
(VII) 44 45 46 47 48 49
Remuneration and Executive Resource Matters Remuneration Committee (RC) Chairman of RC is independent Members of RC disclosed Names of ID in RC disclosed Process used to determination remuneration Remuneration of ED linked to performance Range of performance-related remuneration ED remuneration includes long term incentive NED remuneration link to level of contribution & responsibilities All executive directors own shares Shares options offered to directors NED not receiving share options Vesting period more than one year Vesting of shares/options subject to performance conditions Total fees and remuneration of each individual director disclosed Individual component of remuneration disclosed Names of directors in each band disclosed Succession planning disclosed Accountability and Audit Audit Committee (AC) Chairman of AC is independent Entire AC is independent AC chairman have accounting/finance expertise Members of AC have accounting/finance expertise Frequency of AC meetings
100
98 98 95 0
81 60 63 51
28 60 15 96 4
86
0
100 0
100
98 40 84 63 12
100
92 100
96 0
92 76 60 48
48 56 14
100 0
80
0
96 0
100 100
20 80 60 16
100
95 100 100
0 85 69 49 31
26 49 21
100 11
92
10
100 0
100 100
51 82 62 18
100
94 100 100
0 94 72 72 56
28 72 15
100 15
100
17
100 0
100 100
28 67 83 11
100
97 100 100
0 80 49 40
100
20 40 7
91 25
63
6
100 0
100 100
49 91 60 11
100 100 100 100
0 90 80 30 0
30 30 0
100 0
100
0
100 0
100
90 40 70 80 0
98 98
100 100
2 100
65 58
100
16 40 18 53 12
79
12
100 0
100 100
60 81 67 26
100 100 100 100
0 86 71 29 0
57 14 0 0 0
57
29
100 0
100 100
43 86
100 43
197
Continuation: Table 7.4
CGI Items
Disclosure Among Firms (%)
2004 20005 2006 2007
Main SESDAQ Main SESDAQ Main SESDAQ Main SESDAQ
(VIII)
50 51 52 53 54 55
Internal Audit, Internal Control and Risk Management Internal control and risk management disclosed Internal auditor report to Chairman of AC Company has internal audit function Company has Code of ethics Company has whistle blowing policy Disclosure of related party transactions
100 7
100 0 0
100
100 8
100 0 0
100
95 15
100 0 0
100
100 11
100 0 0
100
100 23
100 0 0
100
100 0
100 0 0
100
95 21
100 0 0
100
100 14
100 0 0
100
198
In line with the earlier discussion that examined CGI disclosure at the aggregate level,
Table 7.4 shows that the level of disclosure improves over time across both Main Board
and SESDAQ-listed IPOs, particularly from 2003 onwards. This is likely due to the
adoption of the Code by SGX in 2003 for all listed companies. However, the variability
of year-on-year improvements in disclosure levels is mixed for both listing boards. For
instance, Main Board-listed IPOs reported a relatively low 64% disclosure in 2000 for
item (40) disclosure of total fees and remuneration of each director, and the percentage
fluctuated over the years until 79% in 2007. In contrast, SESDAQ-listed IPOs started
with a higher percentage of 76% disclosure for the same item in 2000, and this
increased to 100% disclosure in 2002, 2003, 2005 and 2006 before it declining to 57%
in 2007. Interestingly, Main Board-listed IPOs reported a relatively high 30% disclosure
in 2000 for item (35) all executive directors own shares, and the percentage increased
substantially to 78% in 2002 before declining yearly to 16% in 2007. On the other hand,
SESDAQ-listed IPOs started with a higher percentage of 47% in 2000, which then
fluctuated over the years, experiencing the highest point of 88% in 2002 and the lowest
point of 28% in 2005. It ended at 57% in 2007, which was high compared to their
counterparts on the Main Board.
Table 7.4 shows that some of the Main Board-listed IPOs have formal orientation
programmes while none of the SESDAQ-listed IPOs disclosed this item. In addition,
apart from 2005 and 2007, Main Board-listed IPOs have a higher percentage of
independent directors who represented at least half of the total board members
compared to their counterparts listed on SESDAQ. The latter disclosed a higher
percentage of independent directors who represented at least one-third, but no more than
one half, of the total board members. Beyond these, other than 2003 and 2004, Main
Board-listed IPOs reported a higher percentage level of firms having internal audit
199
functions than the SESDAQ-listed IPOs. These observations may be explained by the
fact that Main Board-listed IPOs are larger than SESDAQ-listed IPOs, and could have
more financial resources to conduct orientation programmes and engage more
independent directors. This argument is consistent with the results of prior studies
where compliance with corporate governance was found to be costly, with larger firms
being more likely to be proactive in complying with the recommended practices of the
Code over smaller firms (Botosan 1997; Hassan & Marston 2008; Ntim 2009). In
addition, information asymmetry and agency problem issues may be greater for larger
firms, and higher compliance and disclosure levels of corporate governance principles
would help to reduce agency cost (Klapper & Love 2004; Beiner et al. 2006). Despite
these arguments, it can be seen that the overall disclosure level found of the SESDAQ-
listed IPOs was marginally higher, if not comparable, to their counterparts listed on the
Main Board from 2003 onwards. Thus, despite disclosure improving over the years for
the sampled IPOs in Singapore, the overall difference between the two listing boards is
not significant.
7.2.3 Disclosure based on industry
As discussed in the previous sub-section, the accounting disclosure literature (Lang &
Lundholm 1993; Botosan 1997; Healy & Palepu 2001) and empirical findings from
corporate governance studies (Bauer, Guenster & Otten 2004; Drobetz, Schillhofer &
Zimmerman 2004; Bebenroth 2005; Werder, Tataulicar & Kolat 2005; Bauer et al.
2008; Ntim, Opong & Danbolt 2010; Kowalewski 2012) suggest that corporate
governance compliance and disclosure varies across different industrial groups. There
were no prior studies conducted on corporate governance disclosure for Singapore IPOs
by industry groups. However, an inaugural study was conducted by the Centre of
Governance, Institutions and Organisation (CGIO) from NUS Business School in 2012
200
for disclosure of corporate governance practices for listed companies in Singapore.
Specifically, this study found that disclosure among the nine industry sectors vary
considerably between 2010 and 2012, where finance, multi-industry, transport, storage
and communications are among the top three sectors with the highest level of
disclosure, and commerce, construction, hotels/restaurants, and manufacturing have the
lowest level of disclosure. However, this study does not show the disclosure results
prior to 2010, and it only covers companies that released their annual reports between 1
January 2011 and 31 December 2011, not the disclosure level of IPOs listed during the
survey period. In addition, the CGIO study does not break down the result for different
listing boards. Therefore, the present study provides additional insight into the
disclosure levels of IPOs listed between 2000 and 2007 and how these levels of
disclosure may be influenced by industry group.
The sample is split into ten industries in accordance with the classifications defined by
SGX. Panels D to M in Table 7.2 present summary descriptive statistics of the
aggregate level of disclosure of the CGI items for the ten industry groups. Several
observations can be made from here.
Firstly, Table 7.2 suggests that the finance, properties, services and others have a higher
overall mean disclosure percentage than the overall average of 57.8%. Specifically, the
properties sector has the highest level of disclosure (62.2%), followed by others (59%)
and then services (58.63%). In contrast, construction (52%), hotels/restaurants (52.67%)
and multi-industry (56%) are the only three industries where the overall mean
disclosure score falls below the overall average. The remaining three industries
(commerce, manufacturing, and transport/storage/communication) recorded similar
disclosure percentages as the overall average. The results gathered here are quite
201
different from the recent study conducted by CGIO (2012), except that both studies
report that construction and hotels/restaurants are among those with the lowest
corporate governance disclosure. However, companies sampled from these two
industries are relatively small as they account for only 2.8% (11 IPOs) and 1.5% (6
IPOs) respectively, in this study, and 4.5% (30 firms) and 2.4% (16 firms), respectively,
for the CGIO study.
Secondly, a closer examination on the minimum and maximum scores over the sample
period showed that manufacturing has the lowest disclosure percentage of 29% in 2000
while commerce records the highest disclosure percentage of 73% in 2007. In addition,
the disparity between the minimum and maximum score is the highest for
manufacturing (43%) and the lowest comes from others (12%). This could be due to the
large sample size for the manufacturing industry (47.6% of the overall sample) and thus
reveals the highest disparity over the sample period. On the other hand, there are only
four IPOs classified under others, which account for only one percent of the sample
size.
Thirdly, Table 7.2 suggests that the overall disclosure level has improved over time for
all industries, particularly from 2003 onwards, and is attributable to the introduction of
the Code in Singapore. A closer observation shows that all industries, except
transport/storage/communication, have recorded an average disclosure percentage of
more than 60% from 2003 onwards. Thus, the introduction of the Code in 2003 has
shown a positive impact on the level of disclosure among industries. Over the sample
period, seven out of the ten industries recorded an improvement of more than 20
percentage points from 2000 to 2007.
202
Finally, Table 7.2 suggests that sampled IPOs by industry show similar distributional
properties to those gathered for the overall sample. Essentially, apart from finance and
properties, it suggests that they are either mildly skewed to the right or left in
comparison to a normal distribution, and have relatively small standard deviations and
show platykurtic distribution. The mild non-normal distributional properties of the CGI
is in line with prior studies conducted by Cheung and Wei (2006), Haniffa and Hudaib
(2006), Francoeur, Labelle & Sinclair-Desgagné (2008) and Ntim (2009).
Table 7.5 presents a comparison of the disclosure levels with all the 55 items in the CGI
for the sampled IPOs from the ten industries over the sample listing periods. Three
interesting observations emerge from this Table. First, apart from the seven items that
have 100% disclosure and another seven items that show 0% disclosure (which have
been covered in section 7.2.1), while there are significant industry category differences
in the level of disclosure with many of the items (which can range from 0% to 100%),
others show less material differences. For instance, three of the 55 items show
consistently high disclosure percentage across the ten industries, where variability
between the lowest and the highest is five percentage points or lower:
• Chairman of NC is independent (14);
• disclosure of NC members (15); and
• disclosure of names of independent directors in NC (16).
In addition, four of the 55 items also show relatively high disclosure with the lowest
being 75% and the highest 100%:
• date of appointment of independent director (12);
• disclosure of names of directors in each remuneration band (42);
• Chairman of AC is independent (45); and
203
• disclosure of internal control and risk management (50).
Second, under the first category of CGI, Board’s conduct of affairs, there are three
industries with no disclosure of each of the three items found in this category over the
years: hotels/restaurants, multi-industry, and others. By contrast, the finance sector
records the highest disclosure percentage (25%) for item (2) training for laws and
regulation, followed by transport/storage/communication (13%). This may be due to the
two industries being highly regulated and the regulation changes more often than other
industries, in particular finance, transport and communication. Thus, these IPOs are
willing to spend on training for laws and regulation for their existing and newly
appointed directors.
Third, three industries recorded the least number of items with 100% disclosure:
manufacturing (9), services (9) and commerce (11). Construction and hotels/restaurants
recorded the most number of items with 0% disclosure (14 items each) followed by
transport/storage/communication (11). The industry sectors that reported the least
number of 0% disclosures are commerce (8), services (8) and finance (9). These
observations suggest that the variability in disclosure among these industries are
relatively high and such variability is also reflected in the relatively higher standard
deviations reported among these industries when compared to the overall standard
deviation presented in Table 7.2.
204
Table 7.5: Summary of disclosure of CGI items by industry
CGI Items
Disclosure Among Firms (%)
All
Commerce
Construction
Finance
Hotels/
Restaurants
Manufacturing
(I) 1 2 3
(II) 4 5 6 7 8
(III) 9
10 11
(IV) 12 13 14 15 16 17 18 19 20 21
(V) 22 23 24 25
Board's Conduct of Affairs Formal orientation program Training for law & regulation Details of training disclosed Board Size and Board Composition Independent directors (ID): 1/3 of board Independent directors (ID): 1/2 of board Complete list of board member disclosed Directors classified as independent Family linked relationship Chairman and CEO CEO is not the chairman Chairman not an executive director Chairman not related to others Board Membership Date of Appointment of independent director Nominating committee (NC) Chairman of NC is independent Members of NC disclosed Names of ID in NC disclosed Educational/professional qualification Working experience Current directorships Past directorship (3yrs) Process of appointment of new member Board performance Formal appraisal board performance Board performance criteria disclosed Individual director performance appraisal Individual director performance appraisal criteria disclosed
1 8 0
84 20
100 95 49
56 47 58
93 72 96
100 99
100 100 100 100
0
63 0
72 0
2
10 0
75 23
100 92 53
47 56 54
92 66 95 98 98
100 100 100 100
0
59 0
66 0
0 9 0
91 0
100 91 55
45 38 63
100
36 100 100 100 100 100 100 100
0
36 0
36 0
0
25 0
75 25
100 100
25
50 25 75
100 100 100 100 100 100 100 100 100
0
75 0
75 0
0 0 0
100
33 100 100
50
33 50 25
100
50 100 100 100 100 100 100 100
0
50 0
50 0
2 6 0
88 19
100 95 54
52 40 50
92 77 95
100 99 99
100 100 100
0
66 0
76 0
205
Continuation: Table 7.5
CGI Items
Disclosure Among Firms (%)
All
Commerce
Construction
Finance
Hotels/
Restaurants
Manufacturing
(VI) 26 27 28 29 30 31 32 33 34
35 36 37 38 39
40
41 42 43
(VII) 44 45 46 47 48 49
Remuneration and Executive Resource Matters Remuneration Committee (RC) Chairman of RC is independent Members of RC disclosed Names of ID in RC disclosed Process used to determination remuneration Remuneration of ED linked to performance Range of performance-related remuneration ED remuneration includes long term incentive NED remuneration link to level of contribution & responsibilities All executive directors own shares Shares options offered to directors NED not receiving share options Vesting period more than one year Vesting of shares/options subject to performance conditions Total fees and remuneration of each individual director disclosed Individual component of remuneration disclosed Names of directors in each band disclosed Succession planning disclosed Accountability and Audit Audit Committee (AC) Chairman of AC is independent Entire AC is independent AC chairman have accounting/finance expertise Members of AC have accounting/finance expertise Frequency of AC meetings
78 94 98 97 0
90 69 54 33
37 51 21 92 6
82
8
97 0
100
98 32 75 56 14
69 91 98 98 0
94 78 55 30
44 52 24 93 3
83
9
100 0
100 100
36 84 45 16
36
100 100 100
0 100 100
36 0
55 27 0
67 0
100
45
100 0
100 100
18 45 18 45
100 100 100 100
0 75 50 50 50
25 75 25 50 25
50
25 75 0
100
75 50 75 50 25
50
100 100 100
0 83 67 17 0
50 33 50
100 0
50
0
100 0
100 100
50 33 83 0
80 96 99 98 0
89 71 47 32
32 41 21 92 7
85
5
98 0
100
99 27 78 58 12
206
Continuation: Table 7.5
CGI Items
Disclosure Among Firms (%)
All
Commerce
Construction
Finance
Hotels/
Restaurants
Manufacturing
(VIII)
50 51 52 53 54 55
Internal Audit, Internal Control and Risk Management Internal control and risk management disclosed Internal auditor report to Chairman of AC Company has internal audit function Company has Code of ethics Company has whistle blowing policy Disclosure of related party transactions
98 12 99 0 0
100
100 6
100 0 0
100
100 0
100 0 0
100
75 25 50 0 0
100
100 17
100 0 0
100
97 16
100 0 0
100
207
Continuation: Table 7.5
CGI Items
Disclosure Among Firms (%)
Multi-Industry
Properties
Services
Transport / Storage /
Communication
Others
(I) 1 2 3
(II) 4 5 6 7 8
(III) 9
10 11
(IV) 12 13 14 15 16 17 18 19 20 21
(V) 22 23 24 25
Board's Conduct of Affairs Formal orientation program Training for law & regulation Details of training disclosed Board Size and Board Composition Independent directors (ID): 1/3 of board Independent directors (ID): 1/2 of board Complete list of board member disclosed Directors classified as independent Family linked relationship Chairman and CEO CEO is not the chairman Chairman not an executive director Chairman not related to others Board Membership Date of Appointment of independent director Nominating committee (NC) Chairman of NC is independent Members of NC disclosed Names of ID in NC disclosed Educational/professional qualification Working experience Current directorships Past directorship (3yrs) Process of appointment of new member Board performance Formal appraisal board performance Board performance criteria disclosed Individual director performance appraisal Individual director performance appraisal criteria disclosed
0 0 0
100
0 100 100
0
100 100 100
100 100 100 100 100 100 100 100 100
0
100 0
100 0
0
10 0
90 30
100 90 60
80 40 50
100
90 100 100 100 100 100 100 100
0
80 0
90 0
1 8 0
78 18
100 97 38
65 57 74
90 69 97
100 98
100 100 100 100
0
61 0
69 0
0
13 0
93 27
100 87 38
81 50 63
100
75 100 100 100 100 100 100 100
0
50 0
81 0
0 0 0
100
25 100 100
25
75 50
100
75 75
100 100 100 100 100 100 100
0
75 0
75 0
208
Continuation: Table 7.5
CGI Items
Disclosure Among Firms (%)
Multi-Industry
Properties
Services
Transport / Storage /
Communication
Others
(VI) 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
41 42 43
(VII) 44 45 46 47 48 49
Remuneration and Executive Resource Matters Remuneration Committee (RC) Chairman of RC is independent Members of RC disclosed Names of ID in RC disclosed Process used to determination remuneration Remuneration of ED linked to performance Range of performance-related remuneration ED remuneration includes long term incentive NED remuneration link to level of contribution & responsibilities All executive directors own shares Shares options offered to directors NED not receiving share options Vesting period more than one year Vesting of shares/options subject to performance conditions Total fees and remuneration of each individual director disclosed Individual component of remuneration disclosed Names of directors in each band disclosed Succession planning disclosed Accountability and Audit Audit Committee (AC) Chairman of AC is independent Entire AC is independent AC chairman have accounting/finance expertise Members of AC have accounting/finance expertise Frequency of AC meetings
100 100 100 100
0 0 0 0 0 0 0 0 0 0
100
0 100
0
100 0 0 0
100 0
100 100 100 100
10 90 60 30 25 40 20 0
100 0
70
10 100
0
100 100
70 80 40 30
82 90 97 94 0
92 61 75 42 46 75 24 95 6
85
11 93 0
100
97 31 70 62 12
88 92 93 85 0
81 44 56 50 13 63 0
90 0
44
6 100
0
100 93 60 69 75 6
100 100 100 100
0 100
50 75 0
25 75 0
100 0
75
0 100
0
100 100
0 50 75 0
209
Continuation: Table 7.5
CGI Items
Disclosure Among Firms (%)
Multi-Industry
Properties
Services
Transport / Storage /
Communication
Others
(VIII) 50 51 52 53 54 55
Internal Audit, Internal Control and Risk Management Internal control and risk management disclosed Internal auditor report to Chairman of AC Company has internal audit function Company has Code of ethics Company has whistle blowing policy Disclosure of related party transactions
100
0 100
0 0
100
100
20 100
0 0
100
99 10
100 0 0
100
100
13 100
0 0
100
100
0 0 0 0
100
210
In sum, the evidence of significant variability in the levels of disclosure of corporate
governance practices among the various industries is in line with prior studies.
Comparatively, the findings gathered here suggest that variability in the level of
disclosure of the 55 items of the CGI observed among the 391 IPOs is explained less by
the board listing than by the industrial groupings. Nevertheless, the analysis gathered by
grouping the sampled IPOs into board listing and industrial groups provide a more in-
depth understanding of the variability of the level of disclosure of corporate governance
over the sample listing period. A positive note observed through this analysis shows that
the overall disclosure for both listing boards and most of the industries have shown
improvement over time, particularly from 2003 onwards. Thus, it can be concluded that
the introduction of the Code in Singapore has had a positive impact on IPOs in
improving their level of corporate governance disclosure despite the Code follows the
UK’s ‘comply or explain’ approach. These findings are certainly more meaningful
compared to prior cross-country studies conducted by Klapper & Love (2004), Durnev
and Kim (2005) and Aggarwal, Campbell and Goodacre (2007) where they used a
relatively small sample of firms based on one year of study.
However, the analyses on the disclosure of the CGI items have been purely descriptive
and has been broken down into two variables: board listing and industry. It has not
addressed the impact of corporate governance disclosure to IPO performance in both the
short- and long-run. In addition, it has not covered the six other control variables
mentioned in Chapter 5. Thus, in order to ascertain whether the descriptive patterns
discussed so far hold in a multivariate regression model, the next few sections examine
the relationship between corporate governance practices and IPO performance in the
short- and long-run.
211
7.3 IPO Performances
7.3.1 Initial returns
Table 7.6 presents the raw initial return (RIR) and market adjusted initial return (MAIR)
by year. It shows that the overall average RIR and MAIR are 20.28% and 20.38%,
respectively. The initial returns for 2000 and 2005 were among the lowest with less than
5% due to the fact that Singapore was experiencing an economic downturn caused by
the dot.com bubble and the aftermath of severe acute respiratory syndrome (SARS)
during these periods. The initial returns increased substantially in 2002 and 2007
following the economy’s recovery after the recession, as well as the positive effects
brought about by the two successful General Elections in late 2001 and mid-2006. 2007
recorded the highest initial returns of more than 48%. Over the sample listing period,
positive RIRs and MAIRs accounted for more than 60% of the total 391 IPOs, which
suggests that the majority of the IPOs are underpriced, a common feature of IPOs.
The average RIR and MAIR reported are different from average MAIR of 36.8%,
average RIR of 31.39%, and average MAIR of 31.7% gathered by Wong and Chiang
(1986), Lee, Taylor and Walter (1996b) and Uddin (2008), respectively. The vast
difference could be attributable to the fact that the sample periods used by the earlier
studies are much earlier than the current study when market conditions and stock
exchange listing requirements were quite different from the current study. For instance,
Wong and Chiang (1986) examine 64 IPOs listed during 1975 and 1984, while Lee,
Taylor and Walter (1996b) examine 128 IPOs listed during 1973 and 1992, and Uddin
(2009) studies 322 IPOs listed between 1990 and 2000. On the contrary, the average
MAIR of 20.38% is more comparable with results reported by Reber and Fong (2006),
and Chen, Li and Loh (2009) where they report an average initial return of 18% and
24.07% for 100 and 253 IPOs listed between 1998 and 2000, and 2004 and 2008
212
respectively, these have some overlap with the sample period for this study. Lower
initial returns in recent years suggest that the Singapore stock market has become more
matured and efficient, which contributes to lower levels of underpricing.
Despite the level of underpricing reported in this study is lower than earlier studies, it is
still relatively higher than those reported in Hong Kong (15.51%),15 the UK (14%)16 and
the US (17.9),17 but is much lower than those reported in Malaysia (83%)18 and in China
(213.4%). 19 The reasons could be due to unique institutional arrangement and
regulatory environment, competitive tendering among underwriters, varied selling
mechanisms, and different levels of information asymmetry and benchmarks employed
among these countries. For instance, the reason Malaysia reported a much higher level
of underpricing than Singapore IPOs could be because of its less effective book building
process and longer listing time lag (Uddin 2008). As for China, it has been reporting
incredibly high average initial return for ‘A’ share IPOs (restricted to Chinese residents)
primarily due to the high investment risks and all these IPOs are strictly regulated by the
Chinese Securities Regulatory Commission (Tian & Megginson 2007).
15 Chen, Li and Loh (2009) 16 Keasey and Short (1992) 17 Ritter (2013) 18 Wan-Hussin (2005) 19 Chen, Choy and Jiang (2007)
213
Table 7.6: Descriptive statistics for initial returns by year
Panel A: Raw Initial Returns (RIRs)
Year
N
Mean
(%)
Median
(%)
SD
(%)
Min
(%)
Max
(%)
Positive^
Fair*
Negative#
2000
2001
2002
2003
2004
2005
2006
2007
64
32
26
49
68
57
45
50
1.78
20.90
40.02
26.27
16.91
4.22
22.28
48.51
-3.72
4.00
18.22
17.86
8.33
-4.55
19.23
33.03
49.14
70.94
94.88
46.39
34.97
87.57
43.18
59.10
-76.92
-62.50
-77.14
-100.00
-38.50
-78.00
-62.31
-50.59
242.92
364.29
441.00
137.74
119.23
631.82
130.30
195.65
24
18
20
39
43
20
33
42
3
4
0
3
1
5
2
0
37
10
6
7
24
32
10
8
Overall
391
20.28
7.41
61.82
-100.00
631.82
239
18
134
Panel B: Market Adjusted Initial Returns (MAIRs)
Year
N
Mean
(%)
Median
(%)
SD
(%)
Min
(%)
Max
(%)
Positive^
Fair*
Negative#
2000
2001
2002
2003
2004
2005
2006
2007
64
32
26
49
68
57
45
50
2.86
22.50
41.22
25.85
16.25
3.39
21.81
48.91
-2.02
4.68
16.01
16.26
7.77
-5.15
17.62
32.66
48.23
68.36
94.00
46.33
34.81
88.41
42.71
59.19
-68.91
-53.51
-75.28
-105.75
-38.22
-79.06
-63.71
-50.35
240.79
354.62
434.49
138.94
118.65
637.16
128.44
197.75
29
24
21
41
43
20
33
42
0
0
0
0
0
0
0
0
35
8
5
8
25
37
12
8
Overall
391
20.38
7.80
61.54
-105.75
637.16
253
0
138
^Positive records number of IPOs whose initial and adjusted cumulated returns are greater than zero. *Fair records number of IPOs whose initial and adjusted cumulated returns are equal to zero. #Negative records number of IPOs whose initial and adjusted cumulated returns are less than zero.
214
Table 7.7 presents the raw and market adjusted initial returns for IPOs listed on the
Main Board and the SESDAQ. It shows that the overall average RIR and MAIR for the
Main Board-listed IPOs are 23.10% and 23.07%, respectively. These are higher than
their counterparts listed on the SESDAQ, which reported an overall average RIR and
MAIR of 14.27% and 14.64% respectively. It suggests that the level of underpricing for
Main Board-listed IPOs are generally higher than those listed on the SESDAQ. A closer
observation from Table 7.7 shows the total number of Main Board-listed IPOs reporting
that positive and negative returns are much higher than SESDAQ-listed IPOs, albeit the
percentage of positive RIR and MAIR between the Main Board and the SESDAQ-listed
IPOs are fairly close and accounted for more than 60% of the IPOs.
On a year-on-year comparison, Main Board-listed IPOs reported the lowest initial
returns in 2000, which is negative, and recorded the highest initial return in 2007.
Similarly, SESDAQ-listed IPOs also recorded their highest initial returns in 2007,
though their lowest initial returns are in 2005, which is slightly more than -1%. These
findings are consistent with the earlier discussion of overall IPO performances when
Singapore experienced economic downturn during 2000 and 2005, but subsequently
recovered, with 2007 recorded the highest initial returns of more than 48% for both
Main Board and SESDAQ-listed IPOs.
215
Table 7.7: Descriptive statistics for initial returns: Main Board vs. SESDAQ
Panel A: Raw Initial Returns (RIRs) – Main Board-listed IPOs
Year
n
Mean
(%)
Median
(%)
SD
(%)
Min
(%)
Max
(%)
Positive^
Fair*
Negative#
2000
2001
2002
2003
2004
2005
2006
2007
47
14
18
27
43
39
35
43
-1.84
38.64
46.29
29.89
20.49
6.76
23.36
48.56
-8.70
4.00
14.46
19.23
9.80
-4.00
20.00
35.42
44.94
101.20
103.78
41.93
35.66
105.38
47.13
60.09
-76.92
-35.56
-21.74
-69.57
-25.00
-78.00
-62.31
-50.59
242.92
364.29
441.00
137.74
119.23
631.82
130.30
195.65
14
8
15
24
29
13
25
35
2
2
0
1
0
4
2
0
31
4
3
2
14
22
8
8
Overall
266
23.10
7.55
68.39
-78.00
631.82
163
11
92
Panel B: Raw Initial Returns (RIRs) – SESDAQ-listed IPOs
Year
n
Mean
(%)
Median
(%)
SD
(%)
Min
(%)
Max
(%)
Positive^
Fair*
Negative#
2000
2001
2002
2003
2004
2005
2006
2007
17
18
8
22
25
18
10
7
11.79
7.11
25.94
21.83
10.76
-1.29
18.50
48.21
6.67
4.51
19.52
11.81
3.70
-6.82
10.15
30.65
59.63
29.76
75.25
52.01
33.55
19.73
26.47
56.96
-64.67
-62.50
-77.14
-100.00
-38.50
-26.19
-9.52
4.76
222.03
75.61
176.67
128.57
100.00
32.35
71.43
173.91
10
10
5
15
14
7
8
7
1
2
0
2
1
1
0
0
6
6
3
5
10
10
2
0
Overall
125
14.27
6.67
44.37
-100.00
222.03
76
7
42
^Positive records number of IPOs whose initial and adjusted cumulated returns are greater than zero. *Fair records number of IPOs whose initial and adjusted cumulated returns are equal to zero. #Negative records number of IPOs whose initial and adjusted cumulated returns are less than zero.
216
Panel C: Market Adjusted Initial Returns (MAIRs) – Main Board-listed IPOs
Year
n
Mean
(%)
Median
(%)
SD
(%)
Min
(%)
Max
(%)
Positive^
Fair*
Negative#
2000
2001
2002
2003
2004
2005
2006
2007
47
14
18
27
43
39
35
43
-0.55
40.23
46.76
28.99
19.85
5.74
22.73
48.89
-6.53
5.94
14.32
20.32
8.50
-5.15
17.99
32.96
43.98
97.62
102.76
41.72
35.80
106.40
46.63
60.09
-68.91
-27.58
-22.24
-67.50
-24.65
-79.06
-63.71
-50.35
240.79
354.62
434.49
138.94
118.65
637.16
128.44
197.75
18
11
15
24
29
13
25
35
0
0
0
0
0
0
0
0
29
3
3
3
14
26
10
8
Overall
266
23.07
8.16
68.11
-79.06
637.16
170
0
96
Panel D: Market Adjusted Initial Returns (MAIRs) – SESDAQ-listed IPOs
Year
n
Mean
(%)
Median
(%)
SD
(%)
Min
(%)
Max
(%)
Positive^
Fair*
Negative#
2000
2001
2002
2003
2004
2005
2006
2007
17
18
8
22
25
18
10
7
12.29
8.70
28.77
22.00
10.08
-1.69
18.57
49.05
9.57
4.29
22.35
8.90
5.68
-5.21
8.96
27.10
58.91
27.80
75.20
52.19
32.82
20.06
26.28
57.73
-67.22
-53.51
-75.28
-105.75
-38.22
-27.03
-8.28
3.51
218.63
74.54
179.67
126.36
92.93
36.57
70.48
176.03
11
13
6
17
14
7
8
7
0
0
0
0
0
0
0
0
6
5
2
5
11
11
2
0
Overall
125
14.64
5.71
44.14
-105.75
218.63
83
0
42
^Positive records number of IPOs whose initial and adjusted cumulated returns are greater than zero. *Fair records number of IPOs whose initial and adjusted cumulated returns are equal to zero. #Negative records number of IPOs whose initial and adjusted cumulated returns are less than zero.
217
Table 7.7 also shows that the initial return is positively skewed whereby the average
initial return for each measure is consistently higher than its median for both the Main
Board and the SESEDAQ IPOs. In addition, the overall standard deviation for RIR and
MAIR for the Main Board are generally higher than those reported for SESDAQ-listed
IPOs, suggesting that the variability of initial returns for Main Board-listed IPOs are
higher than SESDAQ-listed IPOs. Further analysis in the table corroborates this
observation given the wider range of initial returns found in Main Board-listed IPOs,
where the minimum and maximum initial returns are slightly lower than -80% and
640%, respectively. On the other hand, SESDAQ-listed IPOs report minimum and
maximum initial returns of around -100% and 220%. This suggests that while Main
Board-listed IPOs have a higher initial return than SESDAQ-listed IPOs, their returns
are more variable than their counterparts listed on the SESDAQ, especially those from
the manufacturing and services industries. This can be explained by the fact that Main
Board-listed IPOs are generally larger, both in firm size and offer size, and are also
more actively traded by a larger group of investors on SGX that comes with a higher
average daily turnover compared to SESDAQ-listed IPOs. The findings are consistent
with the outcome reported by Saunders and Lim (1990), albeit their study only
measures a very small sample of 17 IPOs (eight from the Main Board and nine from the
SESDAQ) listed between January 1987 and June 1988.
Table 7.8 presents the raw and market adjusted initial returns for IPOs by industry. It
shows that IPOs from three industries – finance, manufacturing and services – recorded
similar or higher average initial returns than the overall average RIR and MAIR, with
finance having the highest average initial return of more than 28%. This result could
suggest that these three industries are perceived as relatively riskier than the rest and
thus support the ex ante uncertainty hypothesis propounded by Ritter (1984). This
218
observation is further supported by the huge standard deviations found among these
three industries, although it should be noted that the number of IPOs in the finance
industry is small (four firms). The maximum and minimum average initial returns come
from manufacturing and service industry, respectively. These findings are in contrast
with an earlier study conducted on IPOs listed during the period 1990 to 2000 by Uddin
(2008), where he concludes that IPOs from commerce and services, hotels/restaurants,
and properties industries recorded the largest underpricing, with an average of more
than 22% for each industry. However, it must be noted that the sample period in
Uddin’s study is earlier than the current study, where the economic performance among
the three industries are quite different from the situation after 2000. In the later period,
Singapore has undergone several changes in economic reforms and policies that have a
significant impact on hotels and properties, due to growing emphasis placed on tourism
and a rising population in the country. In addition, Uddin (2008) combines the
commerce and service industries into one and thus the result generated is not directly
comparable to the current study, where IPOs from these two industries are analysed
separately.
On a separate note, these results are in line with those found by Goergen, Renneboog
and Khurshed (2006), where they report that IPOs from manufacturing and service
industries listed between 1996 and 2000 are among the largest underpricing examples in
Germany and France. Similarly, Shen, Coakley and Instefjord (2011) also conclude that
IPOs from the service industry (listed between 1998 and 2003) in China recorded the
highest level of underpricing, with an average initial return of more than 178%. This is
far higher than the Singapore IPOs from the service industry which have an average of
slightly more than 20%.
219
A closer observation from Table 7.8 shows the total number of IPOs reporting that
positive initial returns are much higher than those recording negative initial return,
suggesting that the majority of IPOs from most industries are underpriced, with the
exception of construction and transport/storage/communication. Only 16 IPOs from
these two industries were overpriced, representing 11.6% of the total IPOs having
negative initial returns.
220
Table 7.8: Descriptive statistics for initial returns by industry
Panel A: Raw Initial Returns (RIRs)
Year
n
Mean
(%)
Median
(%)
SD
(%)
Min
(%)
Max
(%)
Positive^
Fair*
Negative#
Commerce Construction Finance Hotels/Restaurants Manufacturing Multi-industry Properties Services Transport/Storage/Communication Others
64
11
4
6
186
1
10
89
16
4
19.73
-2.06
28.82
14.79
25.41
4.00
1.24
20.24
-3.57
-0.35
7.28
-5.00
6.36
5.00
10.00
4.00
1.67
8.51
-6.06
14.55
57.07
36.55
62.53
36.75
69.49
0
26.36
59.79
26.21
33.32
-42.11
-62.50
-16.66
-20.56
-78.00
4.00
-54.84
-100.00
-43.85
-50.00
364.29
75.61
119.23
84.62
631.82
4.00
47.62
242.92
55.88
19.51
37
3
2
3
124
1
5
55
6
3
3
2
0
1
5
0
2
4
1
0
24
6
2
2
57
0
3
30
9
1
Overall
391
20.28
7.41
61.82
-100.00
631.82
239
18
134
Panel B: Market Adjusted Initial Returns (MAIRs)
Year
n
Mean
(%)
Median
(%)
SD
(%)
Min
(%)
Max
(%)
Positive^
Fair*
Negative#
Commerce Construction Finance Hotels/Restaurants Manufacturing Multi-industry Properties Services Transport/Storage/Communication Others
64
11
4
6
186
1
10
89
16
4
19.74
-1.73
28.64
14.89
25.44
0.77
1.02
20.66
-3.34
-2.07
7.25
-1.72
6.96
2.84
9.98
0.77
0.79
8.59
-4.82
13.66
55.74
34.87
62.70
38.11
69.19
0
26.10
60.08
27.89
32.97
-43.28
-53.51
-18.01
-19.89
-79.06
0.77
-56.73
-105.75
-45.74
-51.46
354.62
74.54
118.65
86.38
637.16
0.77
45.88
240.79
59.20
15.85
39
5
2
4
128
1
5
60
6
3
0
0
0
0
0
0
0
0
0
0
25
6
2
2
58
0
5
29
10
1
Overall
391
20.38
7.80
61.54
-105.75
637.16
253
0
138
221
7.3.2 Post-listing returns
Table 7.9 presents the 10-day cumulative abnormal returns (CAR) immediately after the
IPO, which breaks down further into the Main Board and the SESDAQ listings (Panel
A), and industry (Panel B). Panel A shows that the overall mean and median CAR are
consistently negative over the years, except in 2006 where a small positive mean CAR
is recorded. This may suggest that IPO investors, especially those flippers who bought
the shares initially, would like to generate realised gains in the earlier period. If they
believe that other investors will follow suit, there will be some price pressure effect
resulting in declining share prices after listing, and some may consider buying back
shares in the secondary market. This result lends support to the findings by Koh, Lam
and Tsui (1993) as well as other markets, for example, in Hong Kong (McGuinness
1993) and China (Mok & Hui 1998). In addition, variation between the overall mean
and median CAR for SESDAQ-listed IPOs is wider than those listed on the Main Board
– 2000, 2006 and 2007 recorded the widest variations. Beyond these, it shows that the
overall average CAR are -8.54%, -4.87% and -16.45% for all Main Board and
SESDAQ-listed IPOs, respectively, which suggests that overall IPO performance is
declining after they are floated for ten days, with SESDAQ-listed IPOs showing a
sharper decline than their counterparts listed on the Main Board. While 2000 and 2004
appear to be the ‘hot issue’ years with the largest number of sample IPOs listed on
SGX, the CAR for 2000 recorded a marginal negative of around four percent as
compared to -15.22% in 2004. Thus, the findings do not relate with the hot and cold
markets anomaly documented in the literature (Ibbotson & Jaffe 1975; Ritter 1984;
Cook, Jarrell & Kieschnick 2003).
Further analysis of the post-listing returns is made by splitting the returns by
categorising the IPOs by industry over the ten days post-IPO in Panel B. It is observed
222
that apart from finance and others, the overall mean and median CAR are consistently
negative across different industries, with commerce, construction and properties
reporting the highest level of negative returns. However, the positive returns generated
from IPOs in finance and other industries are not representative as the sample size is
relatively small, with only four IPOs each listed in these two industries during the
sample period. Despite having the largest sample of IPOs, the overall mean and median
CAR for manufacturing IPOs is very close, albeit the variation between the mean and
median CAR is larger for SESDAQ-listed IPOs in this industry. It may suggest that
investors investing their money in IPOs from the manufacturing industry generally have
homogenous expectation in the post-listing returns from each of the board listings,
albeit the negative returns from the SESDAQ-listed IPOs are higher than those on the
Main Board.
In sum, post-listing returns of the sample IPOs over the ten days after listing have
showed a decline over the years and also in most industries, with SESDAQ-listed IPOs
reported a higher level of decline. This suggests the returns to IPO investors are not
maintained across the first ten days, despite the initial returns showing a healthy
positive return of more than 20% (as discussed earlier).
223
Table 7.9: Cumulative abnormal returns over the first ten days
Panel A: Main Board vs. SESDAQ by year
Year Overall Main Board SESDAQ
n
Mean
(%)
Median
(%)
n
Mean
(%)
Median
(%)
n
Mean
(%)
Median
(%)
2000
2001
2002
2003
2004
2005
2006
2007
64
32
26
49
68
57
45
50
-4.05
-6.88
-7.54
-10.59
-15.22
-7.94
1.18
-14.18
-8.76
-6.28
-8.21
-9.85
-11.38
-3.77
-1.91
-11.52
47
14
18
27
43
39
35
43
-5.04
-4.46
0.53
-6.07
-9.15
-5.69
7.47
-11.31
-11.69
-9.48
-6.74
-5.46
-7.03
-3.79
1.74
-10.01
17
18
8
22
25
18
10
7
-1.31
-8.76
-25.70
-16.13
-25.66
-12.82
-20.85
-31.81
-8.95
-7.28
-23.07
-15.64
-21.67
-13.99
-14.69
-25.99
Overall
391
-8.54
-6.98
266
-4.87
-5.44
125
-16.35
-12.66
Panel B: Main Board vs. SESDAQ by industry
Industry
Overall Main Board SESDAQ
n
Mean
(%)
Median
(%)
n
Mean
(%)
Median
(%)
n
Mean
(%)
Median
(%)
Commerce Construction Finance Hotels/Restaurants Manufacturing Multi-industry Properties Services Transport/Storage/Communication Others
64
11
4
6
186
1
10
89
16
4
-11.97
-25.22
8.93
-4.87
-8.73
-5.34
-10.39
-5.70
-6.17
9.39
-9.80
-22.46
5.54
-2.63
-8.31
-5.34
-7.42
-8.34
-2.03
-2.50
37
5
4
1
145
0
8
51
12
3
-5.28
-18.80
8.93
7.04
-5.59
-
-8.47
-3.70
-2.11
14.61
-4.52
-19.18
5.54
7.04
-6.38
-
-5.63
-7.64
-1.56
-0.96
27
6
0
5
41
1
2
38
4
1
-21.14
-30.57
-
-7.25
-19.83
-5.34
-18.08
-8.40
-18.37
-6.29
-17.51
-28.91
-
-2.40
-15.81
-5.34
-18.08
-10.92
-6.23
-6.29
Overall
391
-8.54
-6.98
266
-4.87
-5.44
125
-16.35
-12.66
224
7.3.3 Long-run performance
Table 7.10 presents the long-run performances of 391 IPOs over the sampled listing
period for each event-window. It shows that long-run performance is, overall, positively
skewed whereby the average return for each measure is generally higher than its median
over different event-windows. For instance, the mean CARs reported between 2000 and
2007 are -21.49%, -37.54% and -52.23% over the 12-month, 24-month and 36-month
post-listing, respectively. The median CARs in the same period are -29.29%, -45.72%
and -66.66%. This suggests that, on average, investors would have experienced
significant negative abnormal returns if they bought the IPO stocks at the offer price
and held them for 36 months post listing. This finding is largely consistent with the
empirical results of prior international studies (e.g. Ritter 1991; Lee, Taylor & Walter
1996a; Kooli & Suret 2002; Chahine 2004; Akhigbe, Johnston & Madura 2006;
Kirkulak 2008; Su & Bangassa 2011). However, the findings are different from studies
of IPOs in China (Moshirian, Ng & Wu 2010), Korea (Kim, Krinsky & Lee 1995),
Malaysia (Jelic, Saadouni & Briston 2001; Ahmad-Zaluki, Campbell & Goodacre
2007), Thailand (Allen, Morkel-Kingsbury & Piboonthanakiat 1999; Komenkul,
Brzeszczynki & Sherif 2013), and the US (Loughran 1993; Loughran & Ritter 1995;
Gompers & Lerner 2003) where all of these studies reported positive returns in the
long-run. A closer inspection on these studies reflects the employment of different
benchmark and time horizon in measuring long-term performance, as well as the low
degree of survivorship after listing. For instance, Moshirian, Ng and Wu (2010) use
three different benchmarks in measuring initial returns and long-run performance of
IPOs over five years in six countries, including China, Hong Kong and Japan: market
index, size- and book-to-market control firm, and a reference portfolio approach. They
conclude that IPOs in these countries reported negative long-run performance, though
the magnitude and degree of underperformance vary when different benchmarks are
225
used. The current study utilizes only one market index, STI and measures the long-run
performance over three years instead of five. In addition, in order to minimize
‘survivorship bias’, all the sampled IPOs survived at least three years or more after
listing, which is in contrast to the results gathered by Gompers and Lerner (2003) where
around 29% of their US IPOs were delisted before the third year of listing.
One interesting observation from Table 7.7 is that the median CAR and BHAR are
consistently negative across different window periods and that the performance of these
IPOs are declining on the whole over the years, with 2004 reported as the lowest
median CAR across the three event-windows. In addition, Table 7.7 shows that the
overall average return for all the measures declines over the 12-month, 24-month and
36-month post-listing periods. This is in line with the findings reported by other long-
run performance of Singapore IPOs by Voon (2009) and Moshirian, Ng and Wu (2010).
The results may suggest that many investors having a myopic view of where they may
not fully understand the extent to which some issuers engage in earnings management
(Teoh, Welch & Wong 1998; Healey & Wahlen 1999) or could be simply
overoptimistic on the long-run performance of these IPOs, which ultimately falls apart
and causes a decline in long-run returns (Naceur & Ghanem 2001).
It is observed that other than the average WR in 2006, the average and median WRs are
consistently lower than one, suggesting that the overall performance of the sample IPOs
is lower than the market average. This is consistent with prior international studies
conducted for Austria (Aussenegg 2006), Brazil (Aggarwal, Leal & Hernandez 1993),
Finland (Keloharju 1993), Malaysia (Jelic, Saadouni & Briston 2001), South Africa
(Page & Reyneke 1997), the UK (Levis 1993), and the US (Ritter 1991). In contrast,
this finding is different from that found by an earlier study by Lee, Taylor and Walter
226
(1996b), where they report an increase average WR of 1.033, 1.194 and 1.254 over the
12-month, 24-month and 36-month post-listing periods respectively, for 132 IPOs listed
between 1973 and 1992 in Singapore. The sharp contrast could be due to changes in the
regulatory and economic environment where the sample period has undergone a period
of significant economic change, which includes the merger of two financial institutions
– the Stock Exchange of Singapore (SES) and the Singapore International Monetary
Exchange (SIMEX) – to form the Singapore Exchange Limited (SGX) in 1999, the
bursting of dot.com companies in 2000 and widespread severe acute respiratory
syndrome (SARS) in 2003, thus showing a downward trend of the aftermarket
performance of these IPOs. However, the General Elections in late 2001 and mid-2006
saw a positive impact on the stock market in 2002 and 2007, respectively.
227
Table 7.10: Long-run performance of IPOs
Year
n
Event-windows
[+1, +12] [+1, +24] [+1, +36]
CAR (%)
BHAR (%)
WR
CAR (%)
BHAR (%)
WR
CAR (%)
BHAR (%)
WR
Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median
2000
2001
2002
2003
2004
2005
2006
2007
64
32
26
49
68
57
45
50
-25.40
-3.85
2.91
-10.90
-50.94
-16.59
6.99
-41.99
-22.90
-6.94
-4.49
-28.40
-57.45
-29.73
-13.76
-33.28
-20.52
-12.88
-13.29
-24.48
-48.16
-27.67
7.57
-30.19
-30.82
-29.53
-12.30
-30.62
-56.23
-31.15
-16.90
-36.18
0.73
0.87
0.86
0.82
0.58
0.76
1.06
0.56
0.60
0.66
0.89
0.75
0.49
0.71
0.87
0.51
-15.46
-9.14
-8.58
-59.66
-70.63
-13.10
-37.30
-60.46
-18.58
-15.31
-30.15
-62.30
-71.66
-45.73
-47.01
-56.80
-18.66
-11.17
-38.54
-74.63
-65.78
-47.94
-43.01
-48.36
-30.21
-31.09
-38.83
-86.19
-81.88
-61.61
-51.97
-45.54
0.74
0.82
0.69
0.49
0.50
0.68
0.56
0.20
0.56
0.61
0.68
0.44
0.38
0.59
0.47
0.26
-33.34
-16.10
-42.13
-70.13
-58.24
-49.44
-71.90
-64.37
-21.08
-31.78
-57.70
-82.30
-97.64
-79.11
-67.65
-76.24
-29.73
-29.98
-78.51
-97.69
-93.88
-64.43
-52.78
-61.84
-41.09
-53.50
-97.20
-111.57
-114.57
-64.90
-60.09
-59.00
0.55
0.70
0.43
0.42
0.46
0.45
0.28
0.17
0.38
0.47
0.34
0.32
0.31
0.31
0.12
0.21
Overall
391
-21.49
-29.29
-23.76
-34.50
0.76
0.65
-37.54
-45.72
-45.45
-49.92
0.57
0.44
-52.23
-66.66
-64.48
-63.51
0.43
0.29
The event-windows are defined in months relative to the listing month. CAR is the summation of the mean benchmark-adjusted returns across all stocks over the event-window periods. BHAR is the equal-weighted returns of the buy-and-hold returns over the event-window periods. WR is the relative return over the event-window periods.
228
Table 7.11 presents the long-run performances of 266 Main Board-listed IPOs (Panel A)
and 125 SESDAQ-listed IPOs (Panel A) over the sampled listing period for each event-
window. It shows that the CAR figures are overall positively skewed, whereby the
average return for each measure is generally higher than its median over different event-
windows. For instance, the mean CARs for the Main Board-listed IPOs between 2000
and 2007 are -17.33%, -33.73% and -52.30% over the 12-month, 24-month and 36-
month post-listings, respectively, and the median CARs in the same period are -22.45%,
-40.45% and -62.41%. In addition, the reported CARs show that the long-run
performance of the Main Board-listed IPOs deteriorate over time, with the highest mean
CAR (27.42%) reported two years after listing in 2001 while the lowest CAR (-67.56%)
was observed three years after listing in 2007. The Main Board-listed IPOs listed in
2001 show positive returns throughout the three years, albeit in a declining trend. In
contrast, SESDAQ-listed IPOs in Panel B show negative CARs for each event-window
throughout the sample period. It also shows that overall returns are lower than their
counterparts listed on the Main Board. This is contrary to the findings by Ahmad-
Zaluki, Campbell and Goodacre (2007), where they conclude that the long-run
performances of the Main and the Second Board IPOs in Malaysia do not differ
significantly. The difference in the conclusion may be because they employ a different
market index for IPOs listed on different boards and that they also use the size-matched
firm approach in measuring both equally-weighted and value-weighted CARs. On the
other hand, the negative returns presented in Panel B of Table 11 supports the empirical
studies of Burrowes and Jones (2004), who report long-run negative returns of IPOs
listed on the Alternative Investment Market (AIM) during the initial two years after
listing.
229
Gompers and Lerner (2003) argue that CAR measures may tend to misrepresent
performance when returns are highly volatile. Thus, to check the robustness of the
results, BHAR and WR are also used in conjunction with CAR to measure the
performance of Main Board and SESDAQ-listed IPOs. In line with the CAR results
reported earlier, the overall BHAR for both Main Board and SESDAQ-listed IPOs are
negative and declining over the years. This suggests that those investing in either or
both Main Board and SESDAQ-listed IPOs on the first day of listing do not generate a
positive abnormal return over the three years after listing. Table 7.11 also shows that the
BHAR figures are overall positively skewed whereby the average return for each
measure is generally higher than its median over different event-windows. Also, the
difference between the median and mean BHAR is largest 12 months after IPO,
narrowing to just less than two and one percent for Main Board and SESDAQ-listed
IPOs, respectively, three years after listing. In addition, the negative returns in BHAR
over the different event windows are higher than the negative returns reported using
CARs. This supports the proposition that the buy-and-hold return method can magnify
under/over performance of IPOs, even if it occurs in a single period (Fama 1998;
Mitchell & Stafford 2000; Gompers & Lerner 2003). This argument is well supported
by Kirkulak (2008) who examines 433 Japanese IPOs listed between 1998 and 2001 and
reports the underperformance of these IPOs generating an average three-year BHAR of
-34.49% and CAR of -18.29%.
In terms of WR, Table 7.11 shows that the overall WR for both Main Board and
SESDAQ-listed IPOs are less than one and decline over the three years, with Main
Board-listed IPOs underperforming SESDAQ-listed ones. For instance, the mean WR
of the Main Board-listed IPOs for 12-month, 24-month and 36-month post-listing
periods are 0.79, 0.61 and 0.45 respectively, while the mean WR of SESDAQ-listed
230
IPOs for 12-month, 24-month and 36-month post-listing periods are 0.67, 0.49 and 0.39,
respectively. This suggests that investors investing in Main Board and/or SESDAQ-
listed IPOs on the first day of listing are worse off, relative to overall market
performance, if they hold the stocks over 1-year, 2-year and 3-year periods after listing.
In line with CAR and BHAR, the WR figures overall are positively skewed whereby the
average relative return for each measure is generally higher than its median over
different event-windows. There is no basis of comparison with the findings with other
Singapore IPO studies, as there do not appear to be any prior studies on Singapore IPOs
by market listing using CAR, BHAR and WR. Nevertheless, the findings of this study
suggest that investors could be overly optimistic on the potential growth of these IPOs
and overpay in the initial period of the listing, which could be due to the existence of
large asymmetric information timing. However, when these investors understand more
about these companies after listing, through information published by the media or
corporate websites, they will realised that they have overvalued these IPOs and thus
create a pressure for downward reduction in returns. This result supports the over
optimism theory developed by DeBondt and Thaler (1985) as well as the cognitive bias
hypothesis suggested by Burrowes and Jones (2004).
231
Table 7.11: Long-run performance of IPOs
Panel A: Main Board-listed IPOs
Year
n
Event-windows
[+1, +12] [+1, +24] [+1, +36]
CAR (%)
BHAR (%)
WR
CAR (%)
BHAR (%)
WR
CAR (%)
BHAR (%)
WR
Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median
2000
2001
2002
2003
2004
2005
2006
2007
47
14
18
27
43
39
35
43
-28.98
29.46
16.24
-0.73
-44.24
-3.55
9.52
-51.77
-30.54
12.95
10.39
-14.22
-44.92
-11.68
4.16
-30.86
-20.57
7.61
3.64
-15.18
-41.17
-19.62
13.20
-36.68
-34.50
-17.37
-1.52
-30.45
-48.82
-26.81
-15.51
-38.52
0.74
1.09
1.04
0.90
0.64
0.83
1.10
0.46
0.65
0.82
0.98
0.76
0.59
0.79
0.87
0.37
-20.57
27.42
7.63
-49.51
-62.06
-4.11
-43.60
-65.91
-22.07
17.12
-13.85
-61.73
-64.54
-28.80
-36.40
-55.22
-15.97
10.33
-11.43
-61.08
-54.95
-42.05
-40.51
-52.18
-49.92
-14.10
-22.31
-76.62
-73.25
-43.83
-52.25
-46.84
0.78
1.06
0.93
0.57
0.58
0.72
0.57
0.14
0.44
0.81
0.81
0.45
0.43
0.73
0.47
0.21
-37.09
21.56
-29.47
-64.82
-64.29
-50.00
-73.43
-67.56
-21.31
10.40
-36.17
-87.08
-91.51
-69.57
-58.97
-72.56
-26.58
-8.27
-53.09
-82.23
-85.52
-68.35
-50.52
-65.54
-63.51
-38.35
-60.48
-93.66
-111.76
-62.12
-59.04
-59.13
0.60
0.90
0.61
0.48
0.52
0.41
0.32
0.12
0.40
0.64
0.49
0.43
0.34
0.31
0.21
0.19
Overall
266
-17.33
-22.45
-18.25
-32.27
0.79
0.69
-33.73
-40.45
-38.07
-46.39
0.61
0.46
-52.30
-62.41
-58.16
-60.88
0.45
0.29
The event-windows are defined in months relative to the listing month. CAR is the summation of the mean benchmark-adjusted returns across all stocks over the event-window periods. MBHAR is the equal-weighted returns of the buy-and-hold returns over the event-window periods. WR is the relative return over the event-window periods.
232
Continuation: Table 7.11
Panel B: SESDAQ-listed IPOs
Year
n
Event-windows
[+1, +12] [+1, +24] [+1, +36]
CAR (%)
BHAR (%)
WR
CAR (%)
BHAR (%)
WR
CAR (%)
BHAR (%)
WR
Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median
2000
2001
2002
2003
2004
2005
2006
2007
17
18
8
22
25
18
10
7
-15.52
-29.76
-27.07
-23.38
-62.46
-44.84
-1.87
18.10
-16.46
-34.78
-27.49
-37.39
-58.00
-53.10
-15.98
24.68
-20.38
-28.83
-51.36
-35.89
-60.19
-45.12
-12.14
9.70
-26.92
-46.41
-55.30
-40.96
-64.79
-54.60
-22.83
15.49
0.72
0.70
0.46
0.71
0.48
0.61
0.90
1.17
0.66
0.49
0.47
0.65
0.45
0.50
0.82
1.39
-1.33
-37.58
-45.05
-72.11
-85.37
-32.58
-15.25
-26.95
-13.68
-48.92
-65.40
-69.91
-76.07
-69.90
-39.02
-28.21
-26.08
-27.88
-99.54
-91.26
-84.41
-60.71
-51.76
-24.90
-28.69
-39.28
-92.35
-95.18
-88.92
-86.49
-49.62
-31.37
0.62
0.63
0.17
0.40
0.37
0.61
0.52
0.59
0.55
0.41
0.22
0.33
0.30
0.42
0.56
0.47
-22.97
-45.39
-70.60
-77.06
-47.82
-48.21
-66.53
-44.77
-30.39
-68.12
-98.36
-69.68
-86.58
-91.00
-66.29
-48.48
-38.45
-46.87
-135.72
-116.67
-108.25
-55.94
-60.70
-39.09
-45.88
-76.12
-116.35
-121.79
-130.16
-71.72
-65.67
-46.98
0.44
0.55
0.01
0.33
0.37
0.54
0.13
0.47
0.23
0.21
0.13
0.25
0.24
0.32
0.10
0.29
Overall
125
-30.33
-37.64
-35.49
-45.52
0.67
0.57
-45.66
-59.66
-61.15
-67.09
0.49
0.37
-52.08
-76.43
-77.95
-77.17
0.39
0.23
The event-windows are defined in months relative to the listing month. CAR is the summation of the mean benchmark-adjusted returns across all stocks over the event-window periods. MBHAR is the equal-weighted returns of the buy-and-hold returns over the event-window periods. WR is the relative return over the event-window periods.
233
Table 7.12 presents the long-run performances of 391 IPOs by industry over the
sampled listing period for each event-window. The results show that, in general, long-
run performances across the industries are negative and declining over the three years
after listing. A closer observation of the table shows that construction and properties
IPOs are the ‘worst hit’ with a mean CAR of -104.49% and a mean BHAR of -109.30%
over the three-year period. Thus, the findings are in consonance with Miller’s (1977)
heterogeneous expectation framework that there is divergence of opinion and
expectation among investors.
In comparing the long-run performance of these IPOs across different industries with
the initial returns presented in Table 7.8, it is observed that most of the IPOs across
different industries generated positive initial returns, with the exception of construction,
transport/storage/communication and others, and report negative long-run returns. Thus,
the findings lend support of the ‘window of opportunity’ hypothesis (Ritter 1991;
Loughran & Ritter 1995) and ‘fad’ hypothesis (De Bondt & Thaler 1985; Aggarwal &
Rivoli). These investors may initially be over-optimistic about the issuers’ prospect and
thus place their bet on them. Subsequently, their over-optimism falls apart due to the
performance of these IPOs not being in accordance with their expectations, and thus a
long-run decline in return is reported (Naceur & Ghanem 2001).
Panel C reveals that the WR over the three years declines across all industries. The IPOs
from hotels/restaurants, multi-industry and others show a mean WR of more than one
after 12-month post-listing. However, these IPOs, together with all the other IPOs from
the remaining seven industries, show an average WR of less than one after 24-month
and 36-month post-listing. These findings differ from those gathered by Hsieh (2002),
who observes that none of the IPOs from the four industries examined (industrial,
234
finance, hotels, and properties) reported a mean WR of more than one over the 1-year,
3-year and 5-year return windows. His study uses an industry/size-matched approach
when comparing the 105 IPOs listed on SES between 1980 and 1996.
235
Table 7.12: IPO performance by industry groups Panel A: CARs
Industry
n
Event-windows
[+1, +12] [+1 +24] [+1, +36]
Mean
(%)
Median
(%)
Mean
(%)
Median
(%)
Mean
(%)
Median
(%)
Commerce Construction Finance Hotels/Restaurants Manufacturing Multi-industry Properties Services Transport/Storage/Communication Others
64
11
4
6
186
1
10
89
16
4
-21.92
-54.68
-9.51
25.05
-23.12
52.47
-19.08
-20.16
-18.01
2.59
-27.65
-27.63
-31.44
30.62
-31.62
52.47
1.36
-26.91
-27.31
9.09
-36.29
-65.65
-22.24
-4.80
-43.00
19.49
-23.07
-32.69
-21.32
-13.98
-40.02
-59.97
-63.04
3.13
-54.86
19.49
-6.28
-42.09
-37.51
-32.51
-40.11
-
104.49
-33.85
-14.39
-58.20
-65.66
-47.56
-52.06
-26.51
-3.13
-55.66
-86.19
-91.46
-5.24
-78.70
-65.66
-27.12
-67.65
-40.87
-39.83
Overall
391
-21.49
-26.55
-37.54
-45.72
-52.23
-66.66
Panel B: BHARs
Industry
n
Event-windows
[+1, +12] [+1 +24] [+1, +36]
Mean
(%)
Median
(%)
Mean
(%)
Median
(%)
Mean
(%)
Median
(%)
Commerce Construction Finance Hotels/Restaurants Manufacturing Multi-industry Properties Services Transport/Storage/Communication Others
64
11
4
6
186
1
10
89
16
4
-27.64
-45.66
-14.23
35.39
-31.82
65.31
5.71
-14.65
-11.37
26.74
-35.23
-42.22
-14.35
18.07
-36.94
65.31
-10.18
-32.28
-29.49
-20.54
-36.07
-74.35
-25.98
-4.99
-50.56
-6.16
-39.74
-49.11
-9.65
-44.12
-50.87
-55.92
-43.13
-24.37
-52.44
-6.16
-51.47
-48.04
-16.12
53.28
-52.28
-92.07
-43.46
-19.04
-66.15
-87.49
-
109.30
-71.23
-32.88
-54.50
-59.21
-62.70
-60.47
-51.48
-67.25
-87.49
-69.86
-63.99
-48.93
-63.30
Overall
391
-23.76
-34.50
-45.45
-49.92
-64.48
-63.51
236
Panel C: WRs
Industry
n
Event-windows
[+1, +12] [+1 +24] [+1, +36]
Mean
(%)
Median
(%)
Mean
(%)
Median
(%)
Mean
(%)
Median
(%)
Commerce Construction Finance Hotels/Restaurants Manufacturing Multi-industry Properties Services Transport/Storage/Communication Others
64
11
4
6
186
1
10
89
16
4
0.74
0.53
0.83
1.34
0.69
1.44
0.92
0.81
0.94
1.03
0.38
0.13
0.35
0.68
0.32
0.80
0.22
0.32
0.44
0.44
0.65
0.21
0.67
0.91
0.52
0.95
0.55
0.58
0.97
0.59
0.48
0.27
0.53
0.69
0.43
0.95
0.25
0.47
0.90
0.39
0.53
0.07
0.59
0.75
0.40
0.00
0.00
0.43
0.67
0.59
0.42
0.09
0.33
0.47
0.28
0.00
0.18
0.28
0.48
0.53
Overall
391
0.76
0.65
0.57
0.44
0.43
0.29
237
7.4 Test of IPO Underpricing
As discussed in Chapter 1, one of the major research questions of this study is to
identify whether issuers with better corporate governance practices will report a lower
underpricing. IPOs that are listed on the Main Board are, on average, larger than those
listed on the SESDAQ. Thus, it will be interesting to ascertain whether there is a
significant difference in the level of underpricing between companies listed on the Main
Board and those listed on the SESDAQ. Further, this study examines whether IPO firms
backed by VCs and having a longer lock-up period will experience a lower level of
underpricing than those non-VC backed IPOs and those IPOs with a shorter lock-up
period. In order to perform multivariate regression analysis, the dependent variable will
be the IPO underpricing, measured by market adjusted initial returns. The CGI will be
used as a proxy for the quality of corporate governance practices.
There is extant literature which discusses the use of numerous proxies for the ex ante
uncertainty to regress underpricing. In line with the previous studies, the following
variables will be used as proxies for ex ante uncertainty: operating history/age (Carter &
Manaster 1990; Megginson & Weiss 1991, Hamao, Packer & Ritter 2000; Loughran &
Ritter 2004), firm size (Firth & Smith 1992; Chen & Firth 1999; Lee, Taylor & Walter
1996a), gross proceeds/offer size (Beatty & Ritter 1986; James & Wier 1990;
Wasserfallen & Wittleder 1994; Aggarwal, Prabhala & Puri 2002), and underwriter
reputation (Tinic 1988; Carter & Manaster 1990; McGuinness 1992; Habib &
Ljungqvist 2001). IPO firms with longer operating history will have more information
available to investors and thus have a lower level of ex ante uncertainty. Similarly,
larger IPO firms with a larger offer size, and thus underwritten by more reputable
underwriters, are expected to have a lower level of ex ante uncertainty which will lead
to a lower level of underpricing.
238
Theoretical and empirical studies have provided evidence that issuers can reduce the ex
ante uncertainty by signalling the quality of the IPO through various mechanisms, such
as larger retention of equity ownership by insiders (Datar, Feltham & Hughes 1991,
Clarkson et al. 1991; Certo, Daily & Dalton 2001; Ritter & Welch, 2002) and provision
of earnings forecasts in the IPO prospectus (Healy & Palepu 1993; Keasey &
McGuiness 1991; Merton 1987; Myers & Majluf 1984; Schrand & Verrecchia 2002).
Thus, IPOs with a larger level of equity retention by owners and providing earnings
forecasts are more likely to report a lower level of underpricing.
The time gap between the date of IPO prospectus and first trading day is employed as a
proxy for the level of information asymmetry. Empirical evidence has suggested that
due to the existence of asymmetric information among issuers, a longer time gap will
increase the risk to investors and thus a higher level of underpricing is observed (How,
Izan & Monroe 1995; Chowdhry & Sherman 1996; Lee, Taylor & Walter 1996a; Mok
& Hui 1998; Chan, Wei & Wang 2004).
For the purposes of this study, the industry variable is included as a control variable
where the IPO firms from the manufacturing, services, construction, properties,
hotels/restaurants, and finance sectors will be compared with IPO firms from other
industries. It is believed that IPO firms from these industry groups are more susceptible
to economic conditions, which means they are generally more risky and expected to be
positively related to the level of underpricing.
In order to test the relationship between the variables mentioned above and the level of
underpricing, the hierarchical multiple regression analysis used by Certo, Daily and
Dalton (2001), Filatotchev and Bishop (2002), and Yatim (2011) will be employed in
239
this study. Model 1 includes only the control variables. Model 2 reports the results of
the main effects (Hypotheses 1a, 2a, 3a and 4a), while Model 3 provides the result for
the equity retained squared to account for the possibility of a non-linear relationship
between equity retention by owners and performance. Due to the possibility of
multicollinearity between the control variables, additional robustness tests are
employed. Specifically, Model 4 excludes the firm size variable, Model 5 excludes the
offer size and Model 6 excludes the earnings forecast variable. The following presents
the regression model of Model 2:
UPRICEit = β0 + β1 CGIit + β2 VCBACKit + β3 LOCK-UPit +β4 LISTINGit +
β5 AGEit + β6 LnFSIZEit + β7 LnOSIZEit + β8 TGAPit +
β9 INDUSTRYit + β10 EFORECASTit + β11 REQUITYit +
β12 UNDERWRITERit + εit
Variable
Explanation
UPRICE
The market adjusted initial return is measured by raw initial return adjusted for return to the SGX STI.
CGI
The index comprises of 55 items that covers various aspects of the Code of Governance in Singapore. This equal-weighted average score gives an ordinal comparison between IPOs and a higher index suggest better quality in corporate governance practices as compared to those with a lower index.
VCBACK
A dummy variable that takes a value of one if the IPO is VC-backed at the time of listing, and zero otherwise.
LOCK-UP
The number of months after listing date during which the pre-IPO shareholders undertake not to dispose any outstanding shares without the consent of the underwriters.
LISTING
A dummy variable that takes a value of one if the IPO is listed on Main Board of SGX, and zero if it is listed on SESDAQ otherwise.
AGE
The number of years since incorporation before listing, calculated as the listing year minus the year of incorporation.
LnFSIZE
The natural log of total assets prior to listing that are disclosed in the IPO prospectus.
LnOSIZE
The natural log of the product of the offer price and the total number of shares offered in the prospectus.
TGAP
The number of days from the date of the prospectus date and first trading date.
INDUSTRY
A dummy variable that takes the value of one if the IPO firm falls under the manufacturing, services, construction, properties, hotels/restaurants and finance sectors, and zero otherwise.
240
EFORECAST
A dummy variable that takes the value of one if the firm provides an earnings forecast in the IPO prospectus, and zero otherwise.
REQUITY
Percentage of total outstanding shares owned directly or indirectly by original owners at the time of listing.
UNDERWRITER
A dummy variable that takes the value of one if the IPO is underwritten by DBS Bank, United Overseas Bank, OCBC Bank and Overseas Union Bank, and zero otherwise.
Table 7.13 presents the descriptive statistics and correlation matrix for variables
employed in this test. The operating history/age of the sample IPOs varied substantially,
with an average of about six years, which is shorter than the average of 17.5 years and
12 years reported by Lee, Walter and Taylor (1996b) and Firth and Liau-Tan (1997),
respectively. It may suggest that recent IPOs have a shorter operating history than those
listed during 1970s-1990s, which may be due to the liberalisation of the stock market
and increasing number of relatively younger companies meeting the stock exchange
listing requirements. The shortest operating history comes from Santak Holdings
Limited, which was listed on SESDAQ in 2001 after less than two months of
incorporation, while the oldest company, BRC Asia Limited, was floated on the Main
Board in 2000 after operating for more than 61 years. The average and median time gap
for IPOs listed between 2000 and 2007 are 11.5 days and 10 days, respectively. These
are relatively close to the results gathered by Lee, Walter and Taylor (1996b) where the
average and median time delay for Singapore IPOs listed between 1973 and 1992 are 16
days and 15 days, respectively. The average proportion of equity retained by the owners
in the sample is about 75% (standard deviation 8%), with the highest and lowest
proportion being 95% and 17%, respectively. The reported average is higher than those
gathered by Lee, Walter and Taylor (1996b), and Firth and Liau-Tan (1997) where they
reported an average equity retention by owners of 68% and 71%, respectively. This
could be attributable to the existence of lock-up period committed by the owners in the
sample IPOs where on average the lock-up period is about seven months.
241
The Pearson correlations on the upper half of Table 7.13 show that CGI is significantly
and positively associated with IPO underpricing at the 5% level while negatively
associated with the operating history of the issuer. In addition, time gap is significantly
negatively related with retained equity at the 5% level. Contrary to earlier studies where
there are strong correlations between firm age and firm size (e.g. Lin 2005; Yatim
2011), there is close to zero correlation between the two in this study. However, as
expected, firm size is positively associated with offer size, but negatively related with
retained equity and lock-up period, at the 1% significant level. This suggests that larger
firms may raise more proceeds at listing and they tend to have more dispersed
ownership and a shorter lock-up period. It is also observed that CGI is significantly and
negatively associated with retained equity and lock-up period at the 1% level, which
suggests that a higher level of compliance with the Code may be necessary for issuers
with a lower percentage of retained ownership and shorter lock-up period in order to
improve the confidence level of investors. Beyond these, the correlation matrix shows
that offer size is significantly and positively associated with time gap at the 1% level,
which suggests issuers with a larger offer size may take a longer time to have the firm
floated since there could be more new shareholders involved. However, the offer size is
significantly and negatively related to retained equity and lock-up period. All other
independent variables have relatively weak correlations with underpricing. These results
are qualitatively similar to the Spearman rank order correlations presented in the lower
triangular half.
242
7.13: Descriptive statistics and correlations for IPO underpricing regression continuous variables
N = 391
Mean
Median
Min
Max
SD
1
2
3
4
5
6
7
8
9
1. IPO underpricing
0.20
0.08
-1.06
6.37
0.62
1.00
0.10*
-0.03
-0.03
-0.03
0.02
0.04
0.03
0.00
2. CGI
57.76
60.00
29.00
73.00
9.35
0.17**
1.00
-0.13*
0.00
0.04
0.04
-0.19**
-0.24**
-0.24**
3. Age
5.38
1.36
0.07
61.62
8.14
-0.01
-0.03
1.00
0.00
0.05
-0.02
0.07
0.11*
-0.05
4. Firm size (Ln)
11.04
10.72
6.25
22.22
1.76
0.02
0.08
-0.08
1.00
0.59**
-0.02
-0.24**
-0.23**
-0.17**
5. Offer size (Ln)
9.81
9.62
7.60
14.38
1.22
-0.01
0.06
-0.09
0.61**
1.00
0.14**
-0.37**
-0.37**
-0.20**
6. Time gap
11.48
10.00
7.00
196.00
9.92
-0.06
-0.07
-0.03
-0.07
-0.04
1.00
-0.12*
-0.11*
0.00
7. Retained equity
0.75
0.75
0.17
0.95
0.08
-0.04
-0.25**
0.06
-0.17**
-0.32**
0.06
1.00
0.98**
0.07
8. Retained equity squared
0.57
0.56
0.03
0.89
0.11
-0.04
-0.25**
0.06
-0.17**
-0.32**
0.06
1.00**
1.00
0.15**
9. Lock-up period
6.96
6.00
0.00
12.00
2.42
-0.04
-0.26**
0.03
-0.22**
-0.28**
0.08
0.20**
0.20**
1.00
*Correlation is significant at the 5% level (2-tailed). **Correlation is significant at the 1% level (2-tailed). Pearson correlations are found at the upper triangular half of the table and Spearman rank order correlation for the lower triangular half of the table. IPO underpricing is measured by the market adjusted initial returns, which is the raw initial returns adjusted for returns to the STI Index. CGI is measured by the overall score for the equally-weighted relevant items, which range from 0 to 100. Age is the number of years the issuer has been in operation prior to listing. Firm size is measured by the natural log of the total assets prior to listing. Offer size is measured by the natural log of the product of offer price and the total number of shares offered. Time gap is measured by the number of days from the date of the prospectus and the listing date. Retained equity is measured by the proportion of shares (excluding options) held directly and indirectly by initial owners immediately after listing. Retained equity squared is the square of equity ownership by the initial owners. Lock-up period is measured by the number of months the owners have pledged not to dispose of any of their shares from the date of listing.
243
7.4.1 Univariate results
Table 7.14 compares the CGI and firm characteristics between two groups of issuers,
one group with positive market adjusted initial returns and the other with negative
market adjusted returns, using the Mann-Whitney U Test (or Wilcoxon Rank-Sum
Test), that tests for differences in median values between two independent sample
groups. It is observed that firms generating positive market adjusted initial returns have
a higher median CGI compared to those firms having negative market adjusted returns,
significant at the 5% level. There is no significant difference in median values for the
other firm characteristics between these two groups.
Table 7.15 compares variation in the level of underpricing, CGI and firm characteristics
between two groups of IPOs: one group listing on the Main Board of SGX while the
other group belongs to IPOs listed on the SESDAQ of SGX adjusted returns, using the
Mann-Whitney U Test. It is observed that firms listed on the Main Board have a higher
level of initial returns than SESDAQ-listed IPOs, though the difference is not
significant. However, they have a lower median operating history compared to those
firms listed on the SESDAQ, significant at the 5% level. In addition, Main Board-listed
IPOs are found to have a larger amount of total assets, raise more proceeds from the
listing, report a lower percentage of shareholdings by the owners, and have a shorter
lock-up period compared to their counterparts listed on the SESDAQ, significant at the
1% level. There is no significant difference in median values for CGI and time gap
between these two groups.
244
Table 7.14: Univariate tests of differences in CGI and firm characteristics between firms
with positive and negative market adjusted initial returns
N
UPrice
CGI Age
LnFSize LnOSize TGap REquity Lock-
up
Positive
initial return
253
Mean 0.428 58.577 5.526 11.050 9.741 11.605 0.755 6.968 Median 0.239 61.000 1.381 10.650 9.622 10.000 0.750 6.000 Negative
initial return
138
Mean -0.209 56.261 5.119 11.032 9.938 11.254 0.750 6.978 Median -0.152 60.000 1.295 10.853 9.664 10.000 0.750 6.000 Sample
differences
Mann- Whitney Z
-16.346
-2.088
-0.502
-0.268
-1.110
-0.586
-0.051
-0.102
Asymp. Sig. (0.000) (0.037) (0.615) (0.789) (0.267) (0.558) (0.959) (0.919) *** **
***Significant at 1% level. **Significant at 5% level. *Significant at 10% level. UPrice is measured by the market adjusted initial returns, which is the raw initial returns adjusted for returns to the STI Index. CGI is measured by the overall score for the equally-weighted relevant items, which range from 0 to 100. Age is the number of years the issuer has been in operation prior to listing. LnFSize is measured by the natural log of the total assets prior to listing. LnOSize is measured by the natural log of the product of offer price and the total number of shares offered. TGap is measured by the number of days from the date of the prospectus and the first trading date. REquity is measured by the proportion of shares (excluding options) held directly and indirectly by initial owners immediately after listing. Lock-up is measured by the number of months the owners have pledged not to dispose of any of their shares from the date of listing.
245
Table 7.15: Univariate tests of differences in initial returns, CGI and firm characteristics
between firms listed on the Main Board and the SESDAQ
N
UPrice
CGI Age
LnFSize LnOSize TGap REquity Lock-
up
Main Board 266 Mean 0.231 57.722 4.918 11.449 10.330 11.759 0.740 6.444 Median 0.082 60.000 1.292 11.171 10.127 10.000 0.748 6.000 SESDAQ 125 Mean 0.146 57.840 6.370 10.181 8.704 10.888 0.780 8.088 Median 0.057 61.000 1.721 10.020 8.605 10.000 0.799 6.000 Sample
differences
Mann-Whitney Z
-0.403
-0.401
-1.974
-8.707
-13.998
-0.168
-6.274
-6.216
Asymp. Sig. (0.687) (0.688) (0.048) (0.000) (0.000) (0.866) (0.000) (0.000) ** *** *** *** ***
***Significant at 1% level. **Significant at 5% level. *Significant at 10% level. UPrice is measured by the market adjusted initial returns, which is the raw initial returns adjusted for returns to the STI Index. CGI is measured by the overall score for the equally-weighted relevant items, which range from 0 to 100. Age is the number of years the issuer has been in operation prior to listing. LnFSize is measured by the natural log of the total assets prior to listing. LnOSize is measured by the natural log of the product of offer price and the total number of shares offered. TGap is measured by the number of days from the date of the prospectus and the first trading date. REquity is measured by the proportion of shares (excluding options) held directly and indirectly by owners immediately after listing. Lock-up is measured by the number of months the owners have pledged not to dispose of any of their shares from the date of listing.
Table 7.16 compares the variation in level of underpricing, CGI and firm characteristics
between two groups of IPOs: one group is VC-backed while the other group belongs to
IPOs that are non VC-backed, using the Mann-Whitney U Test. It is observed that firms
which are VC-backed have a higher level of initial returns than non VC-backed IPOs,
though the difference is not considered significant. In addition, VC-backed IPOs are
found to have a larger amount of total assets and a shorter time gap between prospectus
date and listing date, significant at the 10% level. In addition, with the backing from
VCs – instilling more confidence in the investors – these firms are able to raise more
proceeds than their non VC-backed counterparts, significant at the 1% level. There is no
246
significant difference in median values for the other firm characteristics between these
two groups.
Table 7.16: Univariate tests of differences in initial returns, CGI and firm
characteristics between firms which are VC-backed and non VC-backed
N
UPrice
CGI Age
LnFSize LnOSize TGap REquity Lock-
up
VC-backed 60 Mean 0.245 58.067 4.195 11.223 10.223 10.850 0.755 6.650 Median 0.114 60.000 1.237 11.030 10.260 10.000 0.749 6.000 Non
VC-backed
331
Mean 0.196 57.70 5.598 11.011 9.735 11.595 0.752 7.027 Median 0.071 60.000 1.397 10.660 9.521 10.000 0.750 6.000 Sample
differences
Mann-Whitney Z
-1.338
-0.081
-0.387
-1.734
-3.258
-1.934
-0.355
-1.158
Asymp. Sig. (0.181) (0.936) (0.698) (0.083) (0.001) (0.053) (0.722) (0.247) * *** *
***Significant at 1% level. **Significant at 5% level. *Significant at 10% level. UPrice is measured by the market adjusted initial returns, which is the raw initial returns adjusted for returns to the STI Index. CGI is measured by the overall score for the equally-weighted relevant items, which range from 0 to 100. Age is the number of years the issuer has been in operation prior to listing. LnFSize is measured by the natural log of the total assets prior to listing. LnOSize is measured by the natural log of the product of offer price and the total number of shares offered. TGap is measured by the number of days from the date of the prospectus and the first trading date. REquity is measured by the proportion of shares (excluding options) held directly and indirectly by owners immediately after listing. Lock-up is measured by the number of months the owners have pledged not to dispose of any of their shares from the date of listing.
247
7.4.2 Multivariate results
Table 7.17 summarises the results based on hierarchical regression analysis, which
includes the expected sign for each coefficient. The bracketed figures found below show
the coefficient values representing White’s (1980) heteroscedasticity adjusted t-
statistics. The Variation Inflation Factor (VIF) statistics for all the independent variable
are less than 10 and not substantially greater than one, suggesting than there is no
multicollinearity issues. Model 1 regresses market adjusted initial returns using all the
control variables discussed earlier. The regression reports a low and insignificant R2 of
0.6% and F-statistic of 1.290. Among the control variables, only underwriter reputation
reports significantly negative at the 5% level, suggesting that issuers underwritten by
reputable underwriters experience a lower level of ex ante uncertainty and are thus less
underpriced. The regression coefficients for underwriter are negatively significant at 5%
in all models. This result is consistent with prior studies (Beatty & Ritter 1986; Booth &
Smith 1986; Carter & Manaster 1990; Higgins & Gulati 1999; How, Izan & Monroe
1995; Li & Masulis 2004; Titman & Trueman 1986).
Model 2 incorporates independent variables while controlling for other effects. The
adjusted R2 is 1.7% and the F-statistic is 1.570, significant at the 10% level. It is
observed that issuers listed on the Main Board reported a higher level of underpricing
than their counterparts listed on the SESDAQ, significant at the 5% level. The findings
gathered above are very different from those gathered by earlier Singapore IPO studies
from Hameed and Lim (1998) and Tan, Eng and Khoo (1999), where the former uses
the signalling argument and the latter apply ex ante uncertainty framework to suggest
Second Board IPOs report a higher level of underpricing than Main Board-listed IPOs
as they argue that investors perceive IPOs listed on the SESDAQ are riskier and issuers
of these IPOs will underprice their shares to signal their quality to prospective investors.
248
The offer size of Main Board-listed IPOs are, on average, larger than the SESDAQ, and
this may well explain the significant underpricing observed. The results reported in this
study are not similar to the findings gathered by Yong and Isa (2003), where they use
the size effect argument and ex ante uncertainty framework to conclude that the initial
returns from the Second Board IPOs are higher than those listed on the Main Board.
The reasons for the different results gathered in this study, compared to those obtained
by Hameed and Lim (1998), and Tan, Eng and Khoo (1989), could be threefold. Firstly,
their studies cover IPOs with both the tender price and fixed price systems, where the
IPOs in this study employ only the fixed price offer. Thus, having two different pricing
systems in the Main Board and the SESDAQ-listed IPOs may yield different levels of
underpricing when compared to having only a fixed price system in this study.
Secondly, the sample size used in the earlier study is much smaller than the current
study. Specifically, Hameed and Lim (1998) cover 53 IPOs while Tan, Eng and Khoo
(1989) examine only 80 IPOs, which represent only 13.6% and 20.5%, respectively, of
the sample size used in this study. Thirdly, the listing period examined is much earlier
than the current study, where Hameed and Lim (1998) study their sample IPOs listed
from April 1993 to July 1995, and Tan, Eng and Khoo (1989) examine their sample
IPOs floated between 1987 and 1993. The listing rules and stock exchange regulations
then are vastly different from those regulated by SGX in the sample period in this study.
In contrast to the signalling and ex ante uncertainty hypothesis, the coefficients on CGI
in Models 2, 4 and 6 are positive and statistically significant at 10% (Models 2 and 4)
and 5% (Model 6), implying that issuers with a higher CGI score reported a higher level
of underpricing. As evident from the correlation presented in Table 7.13, there is a
relatively low correlation of 0.1 between underpricing and CGI, albeit its significance is
249
at 5%. In addition, Models 3 and 5 suggest that CGI, while positively associated with
underpricing, is not significant. Thus, the conclusion gathered here is rather mixed, and
it is consistent with those views gathered in the qualitative phrase. In view of this,
alternative regression models will be presented in the next sub-section to further
examine whether any of the key board characteristics provides explanatory power to
IPO underpricing.
Contrary to the Singapore IPO study by Wang, Wang and Lu (2003), there is no
significant difference in the underpricing of VC-backed and non-VC backed IPOs,
resulting in the certification model discussed extensively in prior literature to be rejected
(e.g. Barry et al. 1990; Sahlman 1990; Megginson & Weiss 1991; Jain & Kini 1995;
Brav & Gompers 1997). The difference in the result in this study with those discussed
by Wang, Wang and Lu (2003) could be due to vastly different sample size, sample
period and methodology employed. Specifically, Wang, Wang and Lu (2003) apply the
matched-size approach for 82 VC-backed IPOs listed between 1987 and 2001, where
the current study compares 60 VC-backed IPOs with 331 non VC-backed IPOs listed
between 2000 and 2007. In addition, Wang, Wang and Lu (2003) provide two separate
analyses when examining the effect of VC-backed IPOs and underpricing: one set of
data includes, while the other excludes the hot issue period. They conclude that VC-
backed IPOs report a significant level of underpricing only when the hot issue period is
excluded. Though the approach differs, our findings are consistent with those
documented by Da Silva, Velayuthen and Walter (2003) on Australian IPOs.
Interestingly, the results do not show that there is a significant relationship between
lock-up period and level of underpricing. The correlation coefficient between lock-up
period and underpricing in Table 13 is zero, which suggests that the lock-up period for
250
the sample IPOs has no effect on the underpricing. This refutes the findings from
Mohan and Chen (2001), Aggarwal, Krigman and Womack (2002), Brav and Gompers
(2003) where they argue that a longer lock-up period will be able to reduce the level of
ex ante uncertainty and thus result in a lower level of underpricing. Therefore, the
outcome of this study suggests that Singapore investors see little credibility in the lock-
up mechanism influencing IPO performance.
One possible reason for the difference in the results of this study compared to those
reported in the US by Mohan and Chen (2001) could be the variation of lock-up period
in the sample size. Essentially, Mohan and Chen (2001) break down the 729 US IPOs
into three categories with respect to length of the lock-up period, where 66% of the
sample IPOs have a lock-up period of six months, 24% have a lock-up period of more
than six months, and the remaining 10% have a lock-up period of less than six months.
In this study, 80% of the sample IPOs have a lock-up period of six months and only
17% have a lock-up period of more than six months. In addition, the maximum lock-up
period for this study is only 12 months, while the study by Mohan and Chen (2001)
shows a maximum lock-up period of three years. Similar variations are also observed in
the study by Brav and Gompers (2003).
In Model 3, an additional variable, retained equity squared, is included to test the
possibility of a curvilinear relationship between insider ownership and underpricing.
The model has an adjusted R2 of 1.6% and an F-statistic of 1.445, which are not
significant. As noted previously, both the regression coefficients for board listing and
underwriter remain significant at the 5% level. The regression coefficient for insider
ownership squared is insignificant, thus providing no support for a curvilinear
relationship between insider director ownership and underpricing as suggested by
251
McConnell and Servaes (1990) and Morck, Shleifer and Vishny (1998). Models 4-6 are
primarily robustness tests based on Model 2 by excluding firm size, offer size and
earnings forecast one at a time. In line with the results reported for Models 1-3, only the
listing and underwriter variables are significant at the 5% level.
252
Table 7.17: Pooled OLS regression of CGI and IPO firm characteristics on the level of
IPO underpricing
Exp
Sign
Models
Variable (1) (2) (3) (4) (5) (6)
Listing + 0.169** 0.168** 0.168** 0.124** 0.173** (2.483) (2.429) (2.484) (2.132) (2.546) CGI - 0.094* 0.094 0.094* 0.092 0.110** (1.475) (1.609) (1.672) (1.641) (2.028) VC-backed - 0.029 0.030 0.029 0.019 0.031 (0.566) (0.566) (0.559) (0.367) (0.599) Lock-up - 0.065 0.065 0.064 0.063 0.070 (1.166) (1.164) (1.161) (1.134) (1.260) Age - 0.005 0.018 0.019 0.018 0.017 0.022 (0.102) (0.357) (0.358) (0.352) (0.325) (0.433) LnFSize - -0.011 0.008 0.009 -0.033 0.008 (-0.178) (0.133) (0.135) (-0.602) (0.119) LnOSize - 0.002 -0.102 -0.102 -0.096 -0.101 (0.023) (-1.270) (-1.266) (-1.401) (-1.260) TGap + 0.031 0.036 0.036 0.035 0.025 0.036 (0.601) (0.689) (0.689) (0.679) (0.481) (0.686) Industry + 0.052 0.028 0.028 0.028 0.033 0.027 (0.999) (0.527) (0.527) (0.823) (0.616) (0.515) EForecast - -0.083 -0.055 -0.055 -0.055 -0.054 (-1.620) (-1.038) (-1.037) (-1.037) (-1.025) REquity - 0.036 0.054 0.062 0.053 0.069 0.052 (0.649) (0.952) (0.233) (0.947) (1.260) (0.915) REquity2 -0.009 (-0.033) Underwriter - -0.118** -0.124** -0.124** -0.124** -0.127** -0.125** (-2.270) (-2.339) (-2.334) (-2.344) (-2.400) (-2.366) Constant 0.068 -0.212 -0.229 -0.200 -0.581 -0.287 Adjusted R2 0.006 0.017 0.015 0.020 0.016 0.017 F-stat 1.290 1.570* 1.445 1.715* 1.563 1.614* N = 391
***Significant at 1% level. **Significant at 5% level. *Significant at 10% level. Numbers in parentheses are t-statistics. The dependent variable is the IPO underpricing measured by market adjusted initial return, which is the raw initial returns adjusted for returns to the STI. Listing is coded as 1 if issuer is listed on Main Board of SGX and 0 if it is listed on SESDAQ. CGI is measured by the overall score for the equally-weighted relevant items, which range from 0 to 100. VC-backed is coded as 1 if issuer is backed by a venture capitalist and 0 otherwise. Lock-up is measured by the number of months the owners have pledged not to dispose of any of their shares from the date of listing. Age is the number of years the issuer has been in operation prior to listing. LnFSize is measured by the natural log of the total assets prior to listing. LnOSize is measured by the natural log of the product of offer price and the total number of shares offered. TGap is measured by the number of days from the date of the prospectus and the first trading date. Industry is coded as 1 if IPO falls under the manufacturing, services, construction, properties, hotels/restaurants and finance sectors, and 0 otherwise. EForecast is coded as 1 if IPO provides earnings forecast in the prospectus and 0 otherwise. Industry is coded as 1 if IPO falls under the following industries: manufacturing, services, construction, properties, hotels/restaurants, and finance and 0 otherwise. REquity is measured by the proportion of shares (excluding options) held directly and indirectly by owners immediately after listing. REquity2 is the square of equity ownership by owners. . Underwriter is coded 1 if the IPO is underwritten by one of the following banks: DBS Bank, United Overseas Bank, OCBC Bank and Overseas Union Bank and 0 otherwise.
253
7.4.3 Alternative models
The results presented above are based on the use of an overall performance governance
index to measure the quality of governance. Prior studies have shown that particular
aspects of corporate governance relating to board structure may proxy for the quality of
governance. In this section, the role of corporate governance and IPO performance is
examined by looking at these specific attributes. Data were collected from IPO
prospectuses on five key board variables: board size, CEO duality, board independence,
female directorship, family members on board and CEO duality.
Table 7.18 presents the descriptive statistics and correlation matrix for the first four
board variables and other variables employed in this test. The board size of the sample
IPOs varied from four members to 23, with an average of 6.54 directors. This average is
similar to the mean of 6.87 directors gathered by Mak et al. (2002), although it is lower
than the average of 7.08 directors in Malaysia (Yatim 2011) but higher than the average
of 5.19 directors in Australia (Lin 2005). For board independence, the sample shows an
average of 40% of the directors are independent, which is lower than 50.12% and 53%
reported by Mak et al. (2002) and Yatim (2011), respectively, but higher than 32%
gathered by Lin (2005). This suggests that many of the IPOs comply with the
recommended practice of having one-third of the board members to be independent.
Essentially, only 50 issuers did not meet the minimum recommended percentage. The
sample shows that 19% of the board consists of family members, which is lower than
27.2% reported by Mak et al. (2002). One firm, PNE Industries Limited, reported 78%
of the board members are family directors at the time of listing.
254
In terms of board gender, the sample shows that an average of 7% of the board
comprises of female directors, which is similar to those reported by NUS for the overall
percentage of female directors in the listed firms in Singapore. However, the percentage
looks pale in comparison to 40.9% in Norway, 27% in Sweden, 26.8% in Finland
(Catalyst 2013), 17.3% in the UK (Sealy & Vinnicombe 2013), 16.6% in the US
(Catalyst 2013), 15.8% in Australia (Women on Board 2013), 9.4% in Hong Kong
(Vernon 2013) and 9% in China (Korn/Ferry Institute 2013).
The Pearson correlations on the upper half of Table 7.18 show that the board size is
significantly and negatively associated with board independence (proxy by the
percentage of independent board members) at the 1% level while positively associated
with the firm size and offer size at the 1% level. While board independence is positively
associated with offer size at the 5% level, it is significantly negatively related to family
members on board and retained equity at the 1% and 5% level respectively. In addition,
there is a significant positive correlation between the percentage of female directorships
and percentage of family members on the board at the 1% level. Further, it is observed
that there is a negative correlation between family members on the board and offer size
at the 1% level. This suggests that larger firms may raise more proceeds at listing and
tend to have more dispersed ownership and a shorter lock-up period. These results are
qualitatively similar to the Spearman rank order correlations presented in the lower
triangular half.
255
7.18: Descriptive statistics and correlations for board structure and IPO underpricing regression variables
N = 391
Mean
Median
Min
Max
SD
1
2
3
4
5
6
7
8
9
10
11
1. UPrice
0.20
0.08
-1.06
6.37
0.62
1.00
-0.06
-0.03
0.03
-0.11*
-0.01
-0.03
-0.03
0.20
0.04
0.00
2. BSize
6.54
6.00
4.00
23.00
1.73
-0.07
1.00
-0.25**
-0.07
-0.05
0.05
0.26**
0.37**
0.03
-0.08
-0.04
3. IndepDir%
0.40
0.40
0.20
0.82
0.10
0.03
-0.33**
1.00
-0.01
-0.14**
-0.02
0.08
0.13**
0.04
-0.12*
-0.08
4. Female%
0.07
0.00
0.00
0.60
0.11
-0.06
-0.05
0.01
1.00
0.28**
0.03
-0.06
-0.05
-0.03
-0.03
0.02
5. Family%
0.19
0.00
0.00
0.78
0.22
-0.11*
-0.02
-0.13**
0.31**
1.00
0.06
-0.04
-0.17**
-0.05
0.05
0.05
6. Age
5.38
1.36
0.07
61.62
8.14
0.00
0.08
-0.03
0.01
-0.03
1.00
-0.06
-0.05
-0.01
0.03
0.08
7. LnFSize
11.04
10.72
6.25
22.22
1.76
0.20
0.25**
0.02
-0.12*
-0.02
-0.08
1.00
0.59**
-0.02
-0.24**
-0.17**
8. LnOSize
9.81
9.62
7.60
14.38
1.22
-0.01
0.26**
0.08
-0.07
-0.15**
-0.09
0.61**
1.00
0.14**
-0.37**
-0.20**
9. TGap
11.48
10.00
7.00
196.00
9.92
-0.06
0.00
-0.02
-0.10
0.04
-0.03
-0.07
-0.04
1.00
-0.12*
0.00
10. REquity
0.75
0.75
0.17
0.95
0.08
-0.04
-0.04
-0.11*
0.05
0.03
0.06
-0.17**
-0.32**
0.06
1.00
0.07
11. Lock-up
6.96
6.00
0.00
12.00
2.42
-0.04
-0.07
-0.06
0.03
0.06**
0.04
-0.22**
-0.28**
0.08
0.20**
1.00
*Correlation is significant at the 5% level (2-tailed). **Correlation is significant at the 1% level (2-tailed). Pearson correlations are found at the upper triangular half of the table and Spearman rank order correlation for the lower triangular half of the table. UPrice is measured by the market adjusted initial returns, which is the raw initial returns adjusted for returns to the STI Index. BSize is measured by the total number of directors on the board. IndepDir% is measured by the percentage of independent directors on the board. Female% is measured by the percentage of female directors on the board. Family% is measured by the percentage of family members on the board. Age is the number of years the issuer has been in operation prior to listing. LnFSize is measured by the natural log of the total assets prior to listing. LnOSize is measured by the natural log of the product of offer price and the total number of shares offered. Time gap is measured by the number of days from the date of the prospectus and the listing date. Retained equity is measured by the proportion of shares (excluding options) held directly and indirectly by initial owners immediately after listing. Lock-up period is measured by the number of months the owners have pledged not to dispose of any of their shares from the date of listing.
256
Table 7.19 compares the board structure between two groups of IPOs, one group with a
listing on the Main Board of SGX while the other group belongs to IPOs listed on the
SESDAQ of SGX adjusted returns, using the non-parametric Mann-Whitney U Test and
the Chi-Square Test for categorical data. It is observed that firms listed on the Main
Board have larger boards on average than those listed on the SESDAQ, significant at
the 1% level. In addition, Main Board-listed IPOs recorded a lower percentage, but not
a significant level of female directors, and a lower percentage of family members on the
board compared to those firms listed on the SESDAQ, significant at the 5% level. There
is no significant difference in mean and median percentages of independent directors
between these two groups.
The results of the Chi-Square test suggest that there is a greater number of Main Board-
listed IPOs where the Chairman and CEO positions are held by different individuals as
compared to SESDAQ-listed IPOs, significant at the 10% level. As for the other two
categorical variables – female directors and family members on the board – there is no
significant difference between the IPOs on the two listings.
257
Table 7.19: Univariate tests of differences in initial returns and board structure between firms
listed on the Main Board and the SESDAQ
N
UPrice
BSize IndepDir%
Female% Family% Leader Female Family
Main Board 266 Mean 0.231 6.721 0.402 0.070 0.179 Median 0.082 6.000 0.400 0.000 0.000 SESDAQ 125 Mean 0.146 6.168 0.396 0.081 0.219 Median 0.057 6.000 0.400 10.020 0.250 Sample
differences
Mann-Whitney Z
-0.403 -3.138 -0.657
-1.028 -1.689
Asymp. Sig. (0.687) (0.002) (0.511) (0.304) (0.091) *** * Total 391 Chi-Square 3.064 0.208 1.113 Asymp. Sig. (0.080) (0.648) (0.291) *
***Significant at 1% level. **Significant at 5% level. *Significant at 10% level. UPrice is measured by the market adjusted initial returns, which is the raw initial returns adjusted for returns to the STI Index. BSize is measured by the total number of directors on the board. IndepDir% is measured by the percentage of independent directors on the board. Female% is measured by the percentage of female directors on the board. Family% is measured by the percentage of family members on the board. Leader is coded as 1 if the Chairman and CEO positions are held by different persons and 0 otherwise. Female is coded as 1 if the board comprises of at least one female director and 0 otherwise. Family is coded as 1 if the board comprises of at least one family member and 0 otherwise.
258
Table 7.20 compares the board structure between two groups of IPOs, one group being
VC-backed while the other group is not, using a non-parametric Mann-Whitney U Test
and a Chi-Square Test for categorical data. It is observed that VC-backed IPOs have a
larger board size, lower percentage of independent directors, and lower percentage of
family members on the board than their non VC-backed counterparts, significant at the
5%, 10% and 1% level, respectively. There is no significant difference in the
percentages of female directors between these two groups.
The results of the Chi-Square test suggest that there is a greater number of VC-backed
IPOs with at least one family member on the board compared to non VC-backed IPOs,
significant at the 5% level. As for the other two categorical variables – CEO duality and
female directors on the board – there is no significant difference between the two sub-
samples.
259
Table 7.20: Univariate tests of differences in initial returns and board structure between
firms which are VC-backed and non VC-backed
N
UPrice
BSize IndepDir%
Female% Family% Leader Female Family
VC-Backed 60 Mean 0.245 6.883 0.380 0.065 0.106 Median 0.114 6.000 0.375 0.000 0.000 Non
VC-backed
331
Mean 0.196 6.483 0.404 0.075 0.208 Median 0.071 6.000 0.400 0.000 0.000 Sample
differences
Mann-Whitney Z
-1.338 -2.039 -1.704
-0.522 -3.334
Asymp. Sig. (0.181) (0.041) (0.088) (0.602) (0.001) ** * *** Total 391 Chi-Square 0.458 0.000 5.558 Asymp. Sig. (0.499) (0.996) (0.018) **
***Significant at 1% level. **Significant at 5% level. *Significant at 10% level. UPrice is measured by the market adjusted initial returns, which is the raw initial returns adjusted for returns to the STI Index. BSize is measured by the total number of directors on the board. IndepDir% is measured by the percentage of independent directors on the board. Female% is measured by the percentage of female directors on the board. Family% is measured by the percentage of family members on the board. Leader is coded as 1 if the Chairman and CEO positions are held by different persons and 0 otherwise. Female is coded as 1 if the board comprises of at least one female director and 0 otherwise. Family is coded as 1 if the board comprises of at least one family member and 0 otherwise.
260
Table 7.21 compares the board structure between two groups of IPOs, one group with
positive market adjusted initial returns and the other with negative market adjusted
returns, using a non-parametric Mann-Whitney U Test. It is observed that apart from the
difference in initial returns between the two groups of IPOs (discussed earlier), there is
essentially no significant difference in board size, percentage of independent directors,
percentage of female directors, and percentage of family members on board between
these two groups of IPOs.
Table 7.21: Univariate tests of differences in board structure between firms with
positive and negative market adjusted initial returns
N
UPrice
BSize
IndepDir%
Female%
Family%
Positive
initial return
Mean Median Negative
initial return
Mean Median
Sample
differences
Mann-Whitney Z Asymp. Sig.
253
138
0.428
0.239
-0.209
-0.152
-16.346
(0.000) ***
6.419
6.000
6.775
6.000
-1.390
(0.164)
0.401
0.400
0.398
0.400
-0.371
(0.711)
0.069
0.000
0.082
0.000
-1.009
(0.313)
0.179
0.000
0.215
0.236
-1.479
(0.139)
***Significant at 1% level. **Significant at 5% level. *Significant at 10% level. UPrice is measured by the market adjusted initial returns, which is the raw initial returns adjusted for returns to the STI Index. BSize is measured by the total number of directors on the board. IndepDir% is measured by the percentage of independent directors on the board. Female% is measured by the percentage of female directors on the board. Family% is measured by the percentage of family members on the board.
261
Table 7.22 compares the level of underpricing and board structure between two groups
of IPOs: one group with at least one female director sitting on the board and the other
group with no female directors on the board, using the Mann-Whitney U Test.
Essentially, there is no significant difference in the level of underpricing between the
two groups. However, it shows that IPOs with at least one female director on the board
has a higher percentage of family members than those without any female director on
the board, significant at the 1% level. This significance could be partly attributed to the
high correlation between the two variables as many of the family-run IPOs have female
directors. However, there is no significant difference in board size and percentage of
independent directors between these two groups.
Table 7.22: Univariate tests of differences in initial returns and board structure between
firms with female directors and without female directors on the board.
N
UPrice
BSize
IndepDir%
Family%
With Female Directors
Mean Median
Without Female Directors
Mean Median
Sample differences
Mann-Whitney Z Asymp. Sig.
150
241
0.197
0.055
0.208
0.095
-1.369
(0.171)
6.747
6.000
6.419
6.000
-1.472
(0.141)
0.390
0.400
0.406
0.400
-1.244
(0.213)
0.277
0.333
0.139
0.000
-6.131
(0.000) ***
***Significant at 1% level. **Significant at 5% level. *Significant at 10% level. UPrice is measured by the market adjusted initial returns, which is the raw initial returns adjusted for returns to the STI Index. BSize is measured by the total number of directors on the board. IndepDir% is measured by the percentage of independent directors on the board. Family% is measured by the percentage of family members on the board.
262
Table 7.23 compares the board structure between two groups of IPOs, one group with
family members on the board while the other group belongs to IPOs managed wholly by
outsiders, using the Mann-Whitney U Test. Essentially, IPOs with family members on
the board reported a lower level of underpricing than those without, significant at the
10% level. In line with general expectation, family-run IPOs reported a lower
percentage of independent directors but a higher level of female directors, both at 1%
level of significance. There is no significant difference in board size between these two
groups.
Table 7.23: Univariate tests of differences in initial returns and board structure between
firms with family members and without family members on board.
N
UPrice
BSize
IndepDir%
Female%
With Family Members on
Board
Mean Median
Without Family Members
on Board
Mean Median
Sample differences
Mann-Whitney Z Asymp. Sig.
185
206
0.137
0.054
0.263
0.096
-1.887
(0.059) *
6.611
6.000
6.485
6.000
-1.096
(0.273)
0.384
0.375
0.414
0.400
-2.973
(0.003) ***
0.106
0.125
0.043
0.000
-6.610
(0.000) ***
***Significant at 1% level. **Significant at 5% level. *Significant at 10% level. UPrice is measured by the market adjusted initial returns, which is the raw initial returns adjusted for returns to the STI Index. BSize is measured by the total number of directors on the board. IndepDir% is measured by the percentage of independent directors on the board. Female% is measured by the percentage of female directors on the board.
263
The relationship between the corporate governance variables and IPO underpricing is
analysed using nine different models which differ based on the set of explanatory
variables included. Table 7.24 summarises the multiple regression results that estimate
the relationship between the level of IPO underpricing and board structure and IPO firm
characteristics. White’s (1980) heteroscedasticity adjusted t-statistics are given in
parentheses. Model 1 regresses market adjusted initial returns using all the control
variables discussed earlier. Model 2 incorporates the independent variables while
controlling for other effects. The adjusted R2 is 1.3% and the F-statistic is 1.452, which
are not significant. Similar to the Model 2 results presented in Table 7.17, issuers listed
on the Main Board reported a higher level of underpricing than their counterparts listed
on the SESDAQ, significant at the 5% level. One possible explanation is that
underwriters expect a downward sloping demand for shares at the IPO and thus set
lower offer prices for larger issues (Liu, Wei & Liaw 2003). It is also interesting to note
that the findings reported here are different from the views expressed by selected
interviewees discussed in the previous chapter that there should be essentially no
difference in underpricing between the two board listings. In line findings reported in
the previous section, there is no statistically significant difference in the underpricing of
VC-backed and non-VC backed IPOs. Also, the results do not suggest there is a
significant relationship between lock-up period and level of underpricing. Among the
control variables, only underwriter reports a significantly negative relationship at the
5% level, suggesting that issuers underwritten by reputable underwriters experience a
lower level of ex ante uncertainty and are thus less underpriced.
In Model 3, additional board structure variables are included to examine the relationship
between these variables and underpricing. The model has an adjusted R2 of 1.9% and F-
statistic of 1.461, which are not significant. It shows that only family membership on
264
boards is negatively associated with underpricing, at a 5% significance level, suggesting
that IPOs with family members on boards report a lower level of underpricing. This is
consistent with Morris’ (1989) argument that the lack of separation of ownership and
management in family-controlled firms may give rise to blurred financial vision,
resulting in a negative relationship with pricing. The remaining four board structures do
not show any significant relationship with underpricing. Similar findings on board size,
CEO duality, and board independence are also reported by Lin (2005). The results
gathered for the additional board structure variables are also in line with the qualitative
findings discussed in the previous chapter where more than half of the interviewees felt
the quality of the board was far more important than board size, gender, independence
and CEO duality.
Models 4-9 are essentially robustness tests based on Model 3 by excluding board size,
board independence, female directorship, family directorship, firm size, and offer size.
In line with the results reported for Models 1-3, only the listing, underwriter and family
membership on boards are significant at the 5% level. In terms of R2 and F-statistic,
only Model 8 reported a significant level of 10%. As noted earlier, both the regression
coefficients for board listing and underwriter remain significant at the 5% level. None of
the remaining controlling variables examined are significantly related to IPO
underpricing.
265
Table 7.24: Pooled OLS regression of board structure and IPO firm characteristics on the level of IPO underpricing
Exp
Sign
Models
Variable (1) (2) (3) (4) (5) (6) (7) (8) (9)
Listing + 0.156** 0.156** 0.162** 0.165** 0.151** 0.149** 0.154** 0.111* (2.312) (2.276) (2.395) (2.423) (2.207) (2.162) (2.262) (1.929) VC-backed - 0.028 0.009 0.009 0.016 0.010 0.026 0.008 0.000 (0.546) (0.170) (0.171) (0.304) (0.191) (0.488) (0.153) (0.002) Lock-up - 0.041 0.040 0.041 0.045 0.039 0.039 0.039 0.038 (0.761) (0.746) (0.759) (0.833) (0.716) (0.720) (0.728) (0.699) BSize - -0.039 -0.018 -0.043 -0.036 -0.038 -0.062 Leader IndepDir% Female% Family%
- -
+ -
(-0.655) 0.012
(0.231) -0.060
(-1.078) 0.072
(1.366) -0.135**
0.006
(0.120) -0.048
(-0.914) 0.074
(1.397) -0.134**
(-0.319) 0.013
(0.251)
0.072 (1.357)
-0.127**
(-0.714) 0.006
(0.122) -0.059
(-1.066)
-0.114**
(-0.594) 0.015
(0.283) -0.042
(-0.755) 0.037
(0.713)
(-0.640) 0.013
(0.240) -0.060
(-1.072) 0.071
(1.350) -0.133**
(-1.087) 0.011
(0.201) -0.073
(-1.335) 0.069
(1.299) -0.126**
(-2.450) (-2.437) (-2.327) (-2.154) (-2.434) (-2.313) Age - 0.005 0.014 0.018 0.016 0.018 0.018 0.014 0.017 0.017 (0.104) (0.266) (0.345) (0.317) (0.344) (0.350) (0.275) (0.332) (0.325) LnFSize - -0.011 0.002 0.020 0.018 0.019 0.015 0.005 -0.016 (-0.181) (0.031) (0.314) (0.279) (0.290) (0.228) (0.083) (-0.278) LnOSize - 0.002 -0.097 -0.104 -0.121 -0.121 -0.097 -0.076 -0.091 (0.025) (-1.216) (-1.206) (-1.487) (-1.441) (-1.129) (-0.893) (-1.198) TGap + 0.031 0.038 0.036 0.037 0.037 0.033 0.035 0.034 0.026 (0.602) (0.734) (0.694) (0.721) (0.706) (0.643) (0.735) (0.659) (0.501) Industry + 0.052 0.034 0.020 0.022 0.021 0.018 0.034 0.020 0.023 (0.999) (0.646) (0.366) (0.413) (0.401) (0.340) (0.637) (0.383) (0.436) EForecast - -0.083 -0.078 -0.075 -0.074 -0.067 -0.078 -0.082 -0.074 -0.077 (-1.621) (-1.538) (-1.453) (-1.431) (-1.311) (-1.506) (-1.592) (-1.447) (-1.487) REquity - 0.036 0.036 0.041 0.038 0.043 0.037 0.039 0.040 0.055 (0.651) (0.656) (0.732) (0.692) (0.769) (0.669) (0.691) (0.718) (1.020)
266
Underwriter - -0.118** -0.136* -0.128** -0.134** -0.129** -0.126** -0.133** -0.129** -0.129** (-2.272) (-2.589) (-2.414) (-2.552) (-2.432) (-2.367) (-2.486) (-2.422) (-2.423) Constant 0.067 0.308 0.538 0.521 0.393 0.585 0.352 0.559 0.220 Adjusted R2 0.006 0.013 0.019 0.020 0.018 0.016 0.005 0.021 0.017 F-stat 1.294 1.452 1.461 1.533 1.481 1.431 1.143 1.556* 1.460 N = 391
***Significant at 1% level. **Significant at 5% level. *Significant at 10% level. Numbers in parentheses are t-statistics. The dependent variable is the IPO underpricing measured by market adjusted initial return, which is the raw initial returns adjusted for returns to the STI Index. Listing is coded as 1 if issuer is listed on Main Board of SGX and 0 if it is listed on SESDAQ. VC-backed is coded as 1 if issuer is backed by a venture capitalist and 0 otherwise. Lock-up is measured by the number of months the owners have pledged not to dispose of any of their shares from the date of listing. BSize is measured by the total number of directors on the board. Leader is coded as 1 if the Chairman and CEO positions are held by different persons and 0 otherwise. IndepDir% is measured by the percentage of independent directors on the board. Female% is measured by the percentage of female directors on the board. Family% is measured by the percentage of family members on the board. Age is the number of years the issuer has been in operation prior to listing. LnFSize is measured by the natural log of the total assets prior to listing. LnOSize is measured by the natural log of the product of offer price and the total number of shares offered. TGap is measured by the number of days from the date of the prospectus and the first trading date. Industry is coded as 1 if IPO falls under the manufacturing, services, construction, properties, hotels/restaurants and finance sectors, and 0 otherwise. EForecast is coded as 1 if IPO provides earnings forecast in the prospectus and 0 otherwise. Industry is coded as 1 if IPO falls under the following industries: manufacturing, services, construction, properties, hotels/restaurants, and finance and 0 otherwise. REquity is measured by the proportion of shares (excluding options) held directly and indirectly by owners immediately after listing. REquity2 is the square of equity ownership by owners. Underwriter is coded 1 if the IPO is underwritten by one of the following banks: DBS Bank, United Overseas Bank, OCBC Bank and Overseas Union Bank and 0 otherwise.
267
7.5 Test of Post-IPO Long-run Performance
This section examines whether the long-run performance of IPO firms is influenced by
board listing, corporate governance practices, involvement of VCs, and length of lock-
up period. It is hypothesised that those IPOs listed on the Main Board would have better
long-run performance. It is also believed that IPO firms that have better corporate
governance practices, have backing from VCs and insiders committed to a longer lock-
up period, which could make them more likely to produce better long-run performance.
In order to perform multivariate regression analysis, the dependent variable will be the
equal-weighted market adjusted buy-and-hold abnormal returns. Brown and Warner
(1980) argue that an equal-weighted return method is more robust than a value-weighted
benchmark in revealing abnormal performance. The CGI will be used as a proxy for the
quality of corporate governance practices.
Previous studies have employed different variables to test the determinants of
aftermarket long-run performance of IPOs. The following variables are included as
control variables to conduct the multivariate regression analysis.
IPO underpricing
Shiller (1990) finds that IPO firms which generate a positive initial return are more
likely to report lower long-run performance. Ritter (1991) examines the 1,526 US IPOs
listed between 1975 and 1984, concluding that the long-run performance of IPOs is
negatively associated with the level of underpricing. Their findings are also testified by
studies conducted in Brazil (Aggarwal, Leal & Hernandez 1993), Finland (Keloharju
1993), Australia (Lee, Taylor & Walter 1996a), Germany (Ljungqvist 1997), New
Zealand (Firth 1997), South Africa (Page & Reyneke 1997); the UK (Khurshed,
Mudambi & Goergen 1999), Poland (Jelic & Briston 2003), and Canada (Kooli & Suret
268
2002). On the contrary, studies from Singapore (Lee, Taylor & Walter 1996b) and
Thailand (Allen, Morkel-Kingsbury & Piboonthanakiat 1999) show a positive
relationship between initial returns and long-run performance.
Rajan and Servaes (1993) argue that a curvilinear relationship between underpricing and
long-run performance may exist due to the interaction between ‘investor sentiment’ and
‘market feedback risk’. Thus, an additional variable, underpriced squared, is included in
the analysis. This approach is also in line with the earlier study of Australian and
Singapore IPOs by Lee, Taylor and Walter (1996a), who concluded that there is a
curvilinear relationship between underpricing and the following one- and two-year
returns in Australia but such a relationship does not exist in Singapore.
Ex ante uncertainty
In line with the test of underpricing discussed in the previous section, operating history,
firm size, offer size and underwriter reputation are used as proxies for the degree of ex
ante uncertainty. Miller (1977) argues there is a negative relationship between ex ante
uncertainty and long-run performance. Firms that have been in operation for a longer
period are more likely to have better control over their operations to ensure a longer
period of survival (Ritter 1991; Firth & Smith 1992; Jain & Kini 1994). In relation to
firm size, studies by Ritter (1991) in the US and Khurshed, Mudambi and Goergen
(1999) in the UK conclude that larger issuers are positively associated with long-run
performance. In addition, earlier studies report a positive relationship between offer size
and long-run performance (Ritter 1991; Levis 1993; Keloharju 1993). Beyond these,
prior studies have also found supportive evidence that IPOs underwritten by more
prestigious underwriters report less negative long-run returns than those managed by
less reputable underwriters (Michaely & Shaw 1994; Carter, Dark & Singh 1998;
269
Paudyal, Saadonui & Briston 1998, Jelic, Saadouni & Briston 2001). Thus, it is
anticipated that the coefficient for operating history (AGE), firm size (LnFSIZE), offer
size (LnOSize) and underwriter reputation (UNDERWRITER) will be positive for the
analysis of long-run performance.
Time gap
In line with the argument put forward by Lee, Taylor and Walter (1996b), the time gap
between IPO prospectus date and the first trading day is employed as a proxy for the
level of informed demand. It is argued that informed investors will invest in IPOs that
come with high returns, and it is expected that a negative relationship exist will between
time gap and long-run performance.
Industry
In order to control for industry effects, issuers from the manufacturing, services,
construction, properties, hotels/restaurants, and finance sectors will be compared with
those issuers from other industries. It is believed that IPO firms from these industry
groups are generally riskier and are expected to be negatively related to the level of
long-run performance.
Earnings forecast
Voluntary disclosure of earnings forecasts by issuers can reduce asymmetric
information as well as ex ante uncertainty. Empirical evidence suggests that there is a
positive relationship between disclosure of earnings forecasts and long-run performance
(How & Yeo 2001; Jelic, Saadouni & Briston 2001; Jog & McConomy 2003).
270
Retention of equity ownership
Based on the signalling hypothesis documented by Leland and Pyle (1977), it is argued
that firms with a larger percentage of insider ownership will demonstrate a higher level
of commitment to the firm, delivering positive returns in both the short-term and long-
run. Gale and Stiglitz (1989) argue that this signal can be weakened by the possibility of
the owner disposing part or all of their shareholdings after listing. However, with the
existence of lock-up periods of six months to a year in most of the IPOs in this study,
the argument by Gale and Stiglitz (1989) may not be of a great concern, at least in the
first year after listing. Prior studies have reported a positive relationship between the
level of retained ownership by insiders and IPO long-run performance (Jain & Kini
1994; Jelic, Saadouni & Briston 2001). Thus, it is expected that IPO firms with a higher
level of retained ownership by insiders will report better long-run performance.
Multivariate regression analysis will be employed to examine the cross-sectional
determinants of long-run performance. Essentially, Models 1-6 regress on the adjusted
returns over the two-year period after listing [+1, +24], defined in months relative to the
listing month and Models 6-12 regress on the adjusted returns over a three-year period
after listing [+1, +36].
The results of the main determinants and the regression model employed are as follows:
271
LRRETURNit = β0 + β1 CGIit + β2 VCBACKit + β3 LOCK-UPit +β4 UPRICEit +
β5 AGEit + β6 LnFSIZEit + β7 LnOSIZEit + β8 TGAPit +
β9 INDUSTRYit + β10 EFORECASTit + β11 REQUITYit +
β12 UNDERWRITERit + εit
Variable
Explanation
LRRETURN
The long-run performance of IPOs is measured by equal-weighted market adjusted buy-and-hold abnormal returns (BHARs) for the two-year aftermarket period for Models 1-6 and for the three-year aftermarket period for Models 7-12.
CGI
The index comprises of 55 items that cover various aspects of the Code of Governance in Singapore. This equal-weighted average score gives an ordinal comparison between IPOs and a higher index suggest better quality in corporate governance practices as compared to those with a lower index.
VCBACK
A dummy variable that takes a value of one if the IPO is VC-backed at the time of listing, and zero otherwise.
LOCK-UP
The number of months after listing date during which the pre-IPO shareholders undertake not to dispose of any outstanding shares without the consent of the underwriters.
UPRICE
The market adjusted initial return is measured by raw initial return adjusted for return to the SGX STI.
LnFSIZE
The natural log of total assets prior to listing that are disclosed in the IPO prospectus.
AGE
The number of years since incorporation before listing, calculated as the listing year minus the year of incorporation.
LnOSIZE
The natural log of the product of the offer price and the total number of shares offered in the prospectus.
TGAP
The number of days from the date of the prospectus date and first trading date.
INDUSTRY
A dummy variable that takes the value of one if the IPO firm falls under the manufacturing, services, construction, properties, hotels/restaurants and finance sectors, and zero otherwise.
EFORECAST
A dummy variable that takes the value of one if the firm provides an earnings forecast in the IPO prospectus, and zero otherwise.
REQUITY
Percentage of total outstanding shares owned directly or indirectly by original owners at the time of listing.
UNDERWRITER
A dummy variable that takes the value of one if the IPO is underwritten by DBS Bank, United Overseas Bank, OCBC Bank and Overseas Union Bank, and zero otherwise.
272
Table 7.25 presents the descriptive statistics and correlation matrix for variables
employed in this test. The Pearson correlations on the upper half of Table 7.25 show
that initial returns are positively associated with two-year post-listing returns, though
the significance of this declines as the long-run performance is extended to a three-year
holding period. In addition, the initial returns are significantly and positively associated
with firm size at the 5% level. As expected, long-run performance is positively and
significantly associated with firm size and offer size at the 1% level, and there is also
positive correlation between firm size and offer size. Interestingly, long-run
performance is negatively associated with CGI at the 1% significant level, suggesting
that those issuers with better corporate governance practices report poorer long-run
performance, albeit the poor performance could also be attributable to other factors such
as poor management and adverse changes in the economic environment in which the
issuer is operating. Beyond these, firm size is negatively and significantly associated
with retained equity and lock-up period at the 1% level. The correlations between long-
run performance and other independent variables are relatively weak and insignificant.
These results are qualitatively similar to the Spearman rank order correlations presented
in the lower triangular half.
273
7.25: Descriptive statistics and correlations for post-IPO long-run performance regression variables
N = 391
Mean
Median
Min
Max
SD
1
2
3
4
5
6
7
8
9
10
11
1. BHAR24
-0.45
-0.50
-4.69
2.98
0.73
1.00
0.70**
0.19**
0.10*
-0.22**
0.06
0.13*
0.16**
-0.02
0.02
0.06
2. BHAR36
-0.64
-0.64
-4.61
3.33
0.77
0.80**
1.00
0.11*
0.06
-0.22**
0.05
0.14**
0.18**
-0.01
0.01
0.05
3. UPrice
0.20
0.08
-1.06
6.37
0.62
0.10*
0.03
1.00
0.77**
0.10*
-0.03
-0.03
-0.03
0.02
0.04
0.00
4. UPrice2
0.42
0.04
0.00
40.60
2.41
-0.06
-0.05
0.48**
1.00
0.02
-0.01
-0.04
-0.02
0.06
0.01
0.03
5. CGI
57.76
60.00
29.00
73.00
9.35
-0.22**
-0.27**
0.17**
0.12*
1.00
-0.13*
0.00
0.04
0.04
-0.19**
-0.24**
6. Age
5.98
1.36
0.07
61.62
8.14
0.11*
0.10
-0.01
0.00
-0.03
1.00
0.00
0.05
-0.02
0.07
-0.05
7. LnFSize
11.04
10.72
6.25
22.22
1.76
0.16**
0.14**
0.02
-0.01
0.08
-0.08
1.00
0.59**
-0.02
-0.24**
-0.17**
8. LnOSize
9.81
9.62
7.60
14.38
1.22
0.18**
0.17**
-0.01
0.05
0.06
-0.09
0.61**
1.00
0.14**
-0.37**
-0.20**
9. TGap
11.48
10.00
7.00
196.00
9.92
0.01
0.00
-0.06
-0.03
-0.07
-0.03
-0.07
-0.04
1.00
-0.12*
0.00
10. REquity
0.75
0.75
0.17
0.95
0.08
0.10*
0.09
-0.04
-0.08
-0.25**
0.06
-0.17**
-0.32**
0.06
1.00
0.07
11. Lock-up
6.96
6.00
0.00
12.00
2.42
0.10
0.06
-0.04
-0.05
-0.26**
0.04
-0.22**
-0.28**
0.08
0.20**
1.00
*Correlation is significant at the 5% level (2-tailed). **Correlation is significant at the 1% level (2-tailed). Pearson correlations are found at the upper triangular half of the table and Spearman rank order correlation for the lower triangular half of the table. BHAR24 is the equal-weighted returns of the buy-and-hold abnormal returns over the event-window period [+1, +24], defined in months relative to the listing month. BHAR36 is equal-weighted returns of the buy-and-hold abnormal returns over the event-window period [+1, +36]. UPrice is measured by the market adjusted initial returns, which is the raw initial returns adjusted for returns to the STI Index. UPrice2 is the square of IPO underpricing. CGI is measured by the overall score for the equally-weighted relevant items, which range from 0 to 100. Age is the number of years the issuer has been in operation prior to listing. LnFSize is measured by the natural log of the total assets prior to listing. LnOSize is measured by the natural log of the product of offer price and the total number of shares offered. TGap is measured by the number of days from the date of the prospectus and the first trading date. REquity is measured by the proportion of shares (excluding options) held directly and indirectly by owners immediately after listing. Lock-up is measured by the number of months the owners have pledged not to dispose of any of their shares from the date of listing.
274
7.5.1 Univariate results
Table 7.26 compares the CGI and firm characteristics between two groups of issuers,
one group with positive market adjusted initial returns and the other with negative
market adjusted returns, using the Mann-Whitney U Test. Panel A divides IPOs into
two groups based on equal-weighted buy-and-hold returns over a two-year holding
period, while B separates the IPOs using returns over a three-year period. Both Panels
show that issuers with positive long-run returns have larger total assets and lower CGI
compared to issuers that reported negative long-run returns, significant at the 5% level.
It is also observed that better performing IPOs have a higher percentage of retained
ownership by the owners after listing compared to those firms having negative long-run
returns, though the significance level differs over a two-year holding period (at 5%) and
a three-year period (at 10%). There is no significant difference in median values for the
other firm characteristics between these two groups in both Panels A and B.
275
Table 7.26: Univariate tests of differences in CGI and firm characteristics between firms with
positive and negative long-run returns
Panel A: [+1, +24]
N
BHAR24
UPrice
CGI Age
LnFSize LnOSize TGap REquity Lock-
up
Positive LR return 70
Mean 0.630 0.233 55.214 5.022 11.399 9.948 10.671 0.767 7.243
Median 0.423 0.067 58.000 1.366 11.049 9.599 10.000 0.751 6.000
Negative LR return 321
Mean -0.691 0.197 58.315 5.461 10.966 9.780 11.657 0.750 6.910
Median -0.609 0.085 61.000 1.353 10.632 9.645 10.000 0.750 6.000
Sample differences
Mann-Whitney Z -13.114 -0.028 -1.984 -0.179 -2.032 -0.891 -0.652 -2.231 -1.040
Asymp. Sig. (0.000) (0.978) (0.047) (0.858) (0.042) (0.373) (0.514) (0.026) (0.299)
*** ** ** **
Panel B: [+1, +36]
N
BHAR36
UPrice
CGI Age
LnFSize LnOSize TGap REquity Lock-
up
Positive LR return 47
Mean 0.691 0.156 54.021 4.425 11.642 10.147 10.830 0.761 7.213
Median 0.432 0.030 57.000 1.271 11.074 9.616 10.000 0.752 6.000
Negative LR return 344
Mean -0.827 0.210 58.270 5.513 10.962 9.764 11.570 0.752 6.936
Median -0.688 0.084 61.000 1.389 10.641 9.633 10.000 0.750 6.000
Sample differences
Mann-Whitney Z -11.124 -0.834 -2.545 -0.635 -2.313 -1.552 -0.607 -1.953 -0.710
Asymp. Sig. (0.000) (0.404) (0.011) (0.525) (0.021) (0.121) (0.544) (0.051) (0.477)
*** ** ** *
***Significant at 1% level. **Significant at 5% level. *Significant at 10% level. Panel A divides sample firms into two groups based on equal-weighted returns of the buy-and-hold abnormal returns over the event-window period [+1, +24]. Panel B divides sample firms into two groups based on equal-weighted returns of the buy-and-hold abnormal returns over the event-window period [+1, +36]. UPrice is measured by the market adjusted initial returns, which is the raw initial returns adjusted for returns to the STI. CGI is measured by the overall score for the equally-weighted relevant items, which range from 0 to 100. Age is the number of years the issuer has been in operation prior to listing. LnFSize is measured by the natural log of the total assets prior to listing. LnOSize is measured by the natural log of the product of offer price and the total number of shares offered. TGap is measured by the number of days from the date of the prospectus and the first trading date. REquity is measured by the proportion of shares (excluding options) held directly and indirectly by owners immediately after listing. Lock-up is measured by the number of months the owners have pledged not to dispose of any of their shares from the date of listing.
276
Table 7.27 compares long-run returns, underpricing, CGI and firm characteristics
between two groups of IPOs: one group is listed on the Main Board of SGX while the
other group belongs to IPOs listed on the SESDAQ of SGX, using the Mann-Whitney U
Test. It is observed that both groups reported negative long-run returns over a two-year
and three-year post listing. However, Main Board-listed IPOs have lower long-run
returns than SESDAQ-listed IPOs, significant at the 1% level. As reported earlier in
Section 7.4.1, Main Board-listed IPOs have a shorter operating history than SESDAQ-
listed IPOs, significant at the 5% level. In addition, they reported a larger amount of
total assets, raise more proceeds from the listing, having a lower percentage of
ownership by insiders and a shorter lock-up period compared to the SESDAQ-listed
IPOs, significant at the 1% level. There is no significant difference in median values for
underpricing, CGI and time gap between the two groups.
Table 7.28 compares the long-run returns, underpricing, CGI and firm characteristics
between two groups of IPOs, one group is VC-backed while the other belongs to IPOs
that are not, using the Mann-Whitney U Test. It is observed that both groups reported
negative long-run returns over a two-year and three-year post listing, though the
differences are not significant. As reported earlier in Section 7.4.1, VC-backed IPOs
have a larger amount of total assets and a shorter time gap, significant at the 10% level.
In addition, they have raise more proceeds from the listing compared to non VC-backed
IPOs, significant at the 1% level. However, there is no significant difference in median
values for underpricing, CGI and other firm characteristics.
277
Table 7.27: Univariate tests of differences in long-run performances, CGI and firm characteristics between firms listed on the
Main Board and the SESDAQ
N
BHAR24
BHAR36
UPrice
CGI Age
LnFSize LnOSize TGap REquity Lock-
up
Main Board 266 Mean -0.381 -0.582 0.231 57.722 4.918 11.449 10.330 11.759 0.740 6.444 Median -0.464 -0.601 0.082 60.000 1.292 11.171 10.127 10.000 0.748 6.000 SESDAQ 125 Mean -0.612 -0.779 0.146 57.840 6.370 10.181 8.704 10.888 0.780 8.088 Median -0.671 -0.771 0.057 61.000 1.721 10.020 8.605 10.000 0.799 6.000 Sample
differences
Mann-Whitney Z -3.631 -3.351 -0.403 -0.401 -1.974 -8.707 -13.998 -0.168 -6.274 -6.216 Asymp. Sig. (0.000) (0.001) (0.687) (0.688) (0.048) (0.000) (0.000) (0.866) (0.000) (0.000) *** *** ** *** *** *** ***
***Significant at 1% level. **Significant at 5% level. *Significant at 10% level. BHAR24 is the equal-weighted returns of the buy-and-hold abnormal returns over the event-window period [+1, +24], defined in months relative to the listing month. BHAR36 is equal-weighted returns of the buy-and-hold abnormal returns over the event-window period [+1, +36]. UPrice is measured by the market adjusted initial returns, which is the raw initial returns adjusted for returns to the STI. CGI is measured by the overall score for the equally-weighted relevant items, which range from 0 to 100. Age is the number of years the issuer has been in operation prior to listing. LnFSize is measured by the natural log of the total assets prior to listing. LnOSize is measured by the natural log of the product of offer price and the total number of shares offered. TGap is measured by the number of days from the date of the prospectus and the first trading date. REquity is measured by the proportion of shares (excluding options) held directly and indirectly by owners immediately after listing. Lock-up is measured by the number of months the owners have pledged not to dispose of any of their shares from the date of listing.
278
Table 7.28: Univariate tests of differences in long-run performances, CGI and firm characteristics between firms listed which
are VC-backed and non VC-backed
N
BHAR24
BHAR36
UPrice
CGI Age
LnFSize LnOSize TGap REquity Lock-
up
VC-backed 60 Mean -0.396 -0.546 0.245 58.067 4.195 11.223 10.223 10.850 0.755 6.650 Median -0.478 -0.621 0.114 60.000 1.237 11.030 10.260 10.000 0.749 6.000 Non
VC-backed
331
Mean -0.465 -0.663 0.196 57.70 5.598 11.011 9.735 11.595 0.752 7.027 Median -0.506 -0.642 0.071 60.000 1.397 10.660 9.521 10.000 0.750 6.000 Sample
differences
Mann-Whitney Z -0.382 -1.042 -1.338 -0.081 -0.387 -1.734 -3.258 -1.934 -0.355 -1.158 Asymp. Sig. (0.702) (0.298) (0.181) (0.936) (0.698) (0.083) (0.001) (0.053) (0.722) (0.247) * *** *
***Significant at 1% level. **Significant at 5% level. *Significant at 10% level. BHAR24 is the equal-weighted returns of the buy-and-hold abnormal returns over the event-window period [+1, +24], defined in months relative to the listing month. BHAR36 is equal-weighted returns of the buy-and-hold abnormal returns over the event-window period [+1, +36]. UPrice is measured by the market adjusted initial returns, which is the raw initial returns adjusted for returns to the STI. CGI is measured by the overall score for the equally-weighted relevant items, which range from 0 to 100. Age is the number of years the issuer has been in operation prior to listing. LnFSize is measured by the natural log of the total assets prior to listing. LnOSize is measured by the natural log of the product of offer price and the total number of shares offered. TGap is measured by the number of days from the date of the prospectus and the first trading date. REquity is measured by the proportion of shares (excluding options) held directly and indirectly by owners immediately after listing. Lock-up is measured by the number of months the owners have pledged not to dispose of any of their shares from the date of listing.
279
7.5.2 Multivariate results
Table 7.29 presents the hierarchical regression results for the long-run performance of
IPOs, measured by the equal weighted buy-and-hold adjusted returns over two years
(Panel A) and three years (Panel B) after listing. Models 1 and 6 present the results for
all the test variables and control variables covered in this study. Specifically, Model 1
presents the regression results employing only the control variables, including
underpricing. Model 2 regresses the long-run returns using all the test variables. Model
3 includes an additional variable, underpricing squared, to capture the possible non-
linearity relationship between IPO underpricing and long-run performance documented
by Lee, Taylor and Walter (1996a). Models 4-6 are the additional robustness tests
employed, whereby Model 4 excludes the firm size variable, Model 5 excludes the offer
size, and Model 6 excludes the earnings forecast variable. The VIF statistics for all the
independent variable are less than 10 and not substantially greater than one, suggesting
than there is no multicollinearity issues. The results observed from these models in both
Panels are discussed below.
Test variables
The board listing is found to be significantly positively associated with post-IPO long-
run performance, but only for returns over the first two years. Panel B shows that there
is no significant relationship between board listing and long-run performance in the
third year. This suggests that Main Board-listed IPOs perform better than their
counterparts listed on the SESDAQ, at least for the first two years after listing. This is
consistent with the study conducted by Ahmad-Zaluki, Campbell and Goodacre (2007),
where they found no significant difference in the long-run performance between Main
Board and Second Board IPOs listed in Malaysia. However, the results gathered in this
study differ from those reported by Tan, Eng and Khoo (1999) where they conclude that
280
SESDAQ-listed IPOs outperform Main Board-listed IPOs in the long run. As noted
earlier, the difference in the results could be due to the sample period in their study
being much earlier than the current study, when the regulatory environment was quite
different from the situation in the sample period. In addition, although they examine the
long-run performances for IPOs that use fixed price issues only, the sample size is very
small (35 Main Board-listed IPOs and 35 SESDAQ-listed IPOs) and survivorship bias
exists in their study: there are only 24 Main Board-listed IPOs and 16 SESDAQ-listed
IPOs at three-year post listing. In this study, all the 391 IPOs remained listed on SGX
after being listed for three years and thus are free from survivorship bias. Further, the
different results could also be attributable to the year-on-year fluctuations in the market
adjusted returns between the two studies. Based on the best knowledge of the
researcher, apart from the earlier study by Tan, Eng and Khoo (1999), there are no
recent studies conducted that compare long-run performance of Main Board and Second
Board IPOs in Singapore. The results reported here are largely in line with the views
given by the investors in Chapter 6 where all the investors interviewed feel there is
essentially no difference in the long-run performance between the two board listings.
Contrary to the expectation that good corporate governance enables companies to
perform better in the long-run, the regression results show a negative relationship
between corporate governance and long-run performance, significant at 1% from
Models 2-5 in both Panels. This is surprising as many interviewees feel that corporate
governance (discussed in Chapter 6) does not have much impact on the issuer in the
short-run but more in the long-term. Nevertheless, it is believed that issuers who report
better long-run performance may be attributed to excellent strategies, continuous
improvement in their products and services, attract the right people to work for them
281
and have a favourable operating environment, which may not be influenced by effective
corporate governance.
The other test variables, VC-backed and lock-up period, are not significant. This implies
that IPOs being VC-backed and having a longer lock-up period do not have significant
influence on long-run performance. These findings are well supported by those reported
by Wang, Wang and Lu (2003) and da Silva Rosa, Velayuthen and Walter (2003) where
they report that there is no significant difference in long-run performance between VC-
backed and non VC-backed IPOs. The findings largely differ from those expressed by
underwriters interviewed and in the US studies (e.g. Jain and Kini 1995; Brav and
Gompers 1997) as the involvement of VCs in well-developed markets such as the US is
far more significant compared to Singapore and Australia.
In relation to the lock-up period, the results are in line with the findings from Cheng and
Renucci (2012), where they conclude there is no significant relationship between the
lock-up period and long-run performance of IPOs. Interestingly, the quantitative results
gathered here refute those views obtained from the interviewees in the previous chapter,
where many feel that IPOs with a longer lock-up period should report better
performance. The difference between the qualitative views and the quantitative results
could be the interviewees may not realize that although the management may have
committed not to dispose of any of their shares within the lock-up period, which is
typically six months to one year, performance after the lock-up period (after one year)
could have been more likely affected by other variables, such as changes in the
economic environment, legal and regulatory framework, and management turnover.
282
Control variables
It is observed that among the control variables, the regression coefficients for
underpricing are negative and significant at 10% in Models 1, 3 and 6, suggesting that
issuers are reporting a higher level of underpricing to show poorer performance two
years after listing. However, this variable loses its significance when the analysis
extends to three years after listing. The results gathered in this study are parallel to those
of Ritter (1991) and Levi (1993) who argue that the existence of fads hypothesis created
an over-optimism among investors that leads to an initial overvaluation of the IPOs and
a lower valuation in the post-listing years.
It is also observed that age and industry effects have a significant impact on long-run
performance. Specifically, the regression coefficients for age and industry, both
significant at 5% (Model 1) and 10% (Model 4) in Panel A, suggest that issuers that do
not fall under the major industries and older firms report better long-run performance
for the first two years, but for returns three years after listing, these variables are not
significant. The positive association between operating history and long-run
performance is in line with those reported by Megginson and Weiss (1991) and Ritter
(1991).
Contrary to general expectations, an inverse and significant relationship is also observed
between long-run performance and firm size, especially two years after listing. Thus,
the findings suggest that smaller IPOs tend to perform better than their larger
counterparts in the long-run, at least for the first two years after listing. This could be
attributable to smaller IPOs, being riskier, and many having to prove themselves after
listing to boost the confidence of investors in order to attract new funds should they
subsequently raise further equity. This result differs from those found by Ritter (1991),
283
Firth and Smith (1992) and Firth et al. (1995), where they conclude that larger IPOs
reported better long-run performance. It must be noted that the proxies used by them
differ from the one employed in this study. For instance, Ritter (1991) and Firth et al.
employed the market value of shares at the IPO as the proxy of firm size, where the
current study uses the natural log of the total assets prior to listing to measure firm size.
Other proxies such as turnover (Chan et al. 1996; Hovey, Li & Naughton 2003), total
shareholders’ equity immediately after the issue of the shares (Chong & Ho 2007) and
the combination of total assets, year-end market value and average turnover (Jelic,
Saaudoni & Briston 1998), may yield different results.
An inverse relationship between long-run performance and offer size is found in both
event-windows, albeit the level of significance varies among models. The result is
consistent with the study by Hsieh (2002) though he concluded that the negative
relationship is not significant. The findings here are contrary to those reported by Ritter
(1991), who argues that firms that raise more proceeds during an IPO have pressure to
perform better in both the short-run and long-term. One possible reason for the
difference in the result is that Ritter (1991) adjusts the offer size based on 1984
purchasing power, which is derived as the product of US GNP Deflator Index and the
average nominal gross proceeds. Whereas the offer size computed in this study ignores
inflation, as Singapore’s inflation has been relatively low with an average of less than
two percent during the sample period (2000-2007).
Table 7.29 shows that IPOs that provide earnings forecast and are underwritten by
reputable underwriters demonstrate better long-run performance. However, when the
test variables are included in the regression, it loses its explanatory power. The findings
are consistent with those reported in Malaysia (Jelic, Saaudoni & Briston 2001) and in
284
the US (Logue et al. 2002), where they found no evidence that underwriters’ reputation
influenced the long-run performance of IPOs.
It is also noted that issuers with a higher equity retention by owners report favourable
long-run performance, though this variable is significant at 1% when only the control
variables are included. Model 3 in Panels A and B suggests there is no curvilinear
relationship between underpricing and long-run performance of IPOs over both event-
windows, which is in line with the findings by Lee, Taylor and Walter (1996b) and Lin
(2005).
285
Table 7.29: Pooled OLS regression of CGI and IPO firm characteristics on the long-run
performance of IPOs
Panel A: [+1, +24]
Exp
Sign
Models
Variable (1) (2) (3) (4) (5) (6)
Listing + 0.086* 0.086* 0.098** 0.022 0.082* (1.777) (1.769) (2.011) (0.526) (1.679) CGI + -0.612*** -0.609*** -0.605*** -0.615*** -0.632*** (-15.292) (-15.167) (-15.003) (-15.271) (-16.305) VC-backed + -0.040 0.038 -0.033 -0.055 -0.042 (-1.192) (-1.018) (-0.887) (-1.509) (-1.146) Lock-up + -0.022 -0.022 -0.013 -0.025 -0.028 (-0.555) (-0.565) (-0.325) (-0.623) (-0.711) UPrice - -0.090* -0.057 -0.098* -0.057 -0.051 -0.060* (-1.922) (-1.552) (1.693) (-1.556) (-1.380) (-1.649) UPrice2 0.053 (0.922) Age + 0.093** 0.063 0.063 0.067* 0.060 0.058 (1.966) (1.705) (1.705) (1.816) (1.629) (1.570) LnFSize + -0.108* -0.132*** -0.130*** -0.190*** -0.131*** (-1.877) (-2.922) (-2.874) (-4.872) (-2.886) LnOSize + -0.093 -0.144** -0.145** -0.229*** -0.145* (-1.524) (-2.530) (-2.542) (-4.638) (-2.545) TGap + 0.005 0.022 0.020 0.036 0.006 0.022 (0.106) (0.598) (0.534) (0.989) (0.166) (0.606) Industry - -0.095** -0.059 -0.059 -0.063* -0.052 -0.058 (-1.998) (-1.554) (-1.569) (-1.662) (-1.377) (-1.524) EForecast + 0.218*** 0.071* 0.069* 0.069* 0.072* (4.689) (1.886) (1.834) (1.826) (1.904) REquity + 0.171*** 0.060 0.061 0.066 0.082** 0.063 (3.382) (1.495) (1.530) (1.634) (2.074) (1.564) Underwriter + 0.165*** 0.059 0.058* 0.061 0.056 0.061 (3.477) (1.572) (1.526) (1.592) (1.463) (1.603) Constant -0.647 3.314*** 3.294*** 3.094*** 2.697*** 3.428***
Adjusted R2 0.179 0.505 0.505 0.495 0.498 0.502 F-stat 10.397*** 31.558*** 29.353*** 32.820*** 33.179*** 33.664*** N = 391
***Significant at 1% level. **Significant at 5% level. *Significant at 10% level. Numbers in parentheses are t-statistics. The dependent variable is the IPO underpricing measured by market adjusted initial return, which is the raw initial returns adjusted for returns to the STI Index. CGI is measured by the overall score for the equally-weighted relevant items, which range from 0 to 100. VC-backed is coded as 1 if issuer is backed by a venture capitalist and 0 otherwise. Lock-up is measured by the number of months the owners have pledged not to dispose of any of their shares from the date of listing. UPrice is the market adjusted initial return and is measured by raw initial return adjusted for return to the SGI STI. UPrice2 is the square of underpricing. Listing is coded as 1 if issuer is listed on Main Board of SGX and 0 if it is listed on SESDAQ. Age is the number of years the issuer has been in operation prior to listing. LnFSize is measured by the natural log of the total assets prior to listing. LnOSize is measured by the natural log of the product of offer price and the total number of shares offered. TGap is measured by the number of days from the date of the prospectus and the first trading date. Industry is coded as 1 if IPO falls under the manufacturing, services, construction, properties, hotels/restaurants and finance sectors, and 0 otherwise. EForecast is coded as 1 if IPO provides earnings forecast in the prospectus and 0 otherwise. Industry is coded as 1 if IPO falls under the following industries: manufacturing, services, construction, properties, hotels/restaurants, and finance and 0 otherwise. REquity is measured by the proportion of shares (excluding options) held directly and indirectly by owners immediately after listing. Underwriter is coded 1 if the IPO is underwritten by one of the following banks: DBS Bank, United Overseas Bank, OCBC Bank and Overseas Union Bank and 0 otherwise.
286
Panel B: [+1, +36]
Exp
Sign
Models
Variable (1) (2) (3) (4) (5) (6)
Listing + 0.065 0.064 0.069 -0.003 0.057 (1.100) (1.094) (1.177) (-0.059) (0.959) CGI + -0.439*** -0.436*** -0.436*** -0.442*** -0.473*** (-9.093) (-9.000) (-9.062) (-9.120) (-10.072) VC-backed + -0.050 -0.048 -0.048 -0.066 -0.054 (-1.131) (-1.071) (-1.075) (-1.497) (-1.203) Lock-up + -0.025 -0.025 -0.022 -0.028 -0.035 (-0.522) (-0.529) (-0.457) (-0.581) (-0.741) UPrice - -0.072 -0.048 -0.087 -0.048 -0.041 -0.054 (-1.481) (-1.083) (-1.247) (-1.089) (-0.937) (-1.218) UPrice2 0.050 (0.728) Age + 0.029 0.008 0.008 0.009 0.005 -0.001 (0.599) (0.171) (0.171) (0.208) (0.114) (-0.020) LnFSize + -0.028 -0.046 -0.045 -0.108** -0.044 (-0.462) (-0.854) (-0.818) (-2.289) (-0.809) LnOSize + -0.115* -0.151** -0.151** -0.181*** -0.153** (-1.820) (-2.196) (-2.204) (-3.065) (-2.211) TGap + 0.025 0.037 0.035 0.042 0.020 0.037 (0.508) (0.828) (0.776) (0.951) (0.456) (0.835) Industry - -0.072 -0.043 -0.044 -0.045 -0.036 -0.042 (-1.471) (-0.946) (-0.958) (-0.984) (-0.797) (-0.903) EForecast + 0.101*** 0.112*** 0.120*** 0.121*** 0.123*** (0.228) (2.695) (2.651) (2.684) (2.709) REquity + 0.127** 0.048 0.049 0.065 0.071 0.053 (2.420) (0.992) (1.020) (1.039) (1.493) (1.089) Underwriter + 0.137*** 0.062 0.061 0.063 0.058 0.065 (2.786) (1.369) (1.332) (1.380) (1.277) (1.410) Constant -0.794 2.209*** 2.190*** 2.128*** 1.530*** 2.416*** Adjusted R2 0.117 0.281 0.280 0.281 0.273 0.269 F-stat 6.726*** 12.679*** 11.797*** 13.685*** 13.200*** 12.916*** N = 391
***Significant at 1% level. **Significant at 5% level. *Significant at 10% level. Numbers in parentheses are t-statistics. The dependent variable is the IPO underpricing measured by market adjusted initial return, which is the raw initial returns adjusted for returns to the STI Index. CGI is measured by the overall score for the equally-weighted relevant items, which range from 0 to 100. VC-backed is coded as 1 if issuer is backed by a venture capitalist and 0 otherwise. Lock-up is measured by the number of months the owners have pledged not to dispose of any of their shares from the date of listing. UPrice is the market adjusted initial return and is measured by raw initial return adjusted for return to the SGI STI. UPrice2 is the square of underpricing. Listing is coded as 1 if issuer is listed on Main Board of SGX and 0 if it is listed on SESDAQ. Age is the number of years the issuer has been in operation prior to listing. LnFSize is measured by the natural log of the total assets prior to listing. LnOSize is measured by the natural log of the product of offer price and the total number of shares offered. TGap is measured by the number of days from the date of the prospectus and the first trading date. Industry is coded as 1 if IPO falls under the manufacturing, services, construction, properties, hotels/restaurants and finance sectors, and 0 otherwise. EForecast is coded as 1 if IPO provides earnings forecast in the prospectus and 0 otherwise. Industry is coded as 1 if IPO falls under the following industries: manufacturing, services, construction, properties, hotels/restaurants, and finance and 0 otherwise. REquity is measured by the proportion of shares (excluding options) held directly and indirectly by owners immediately after listing. Underwriter is coded 1 if the IPO is underwritten by one of the following banks: DBS Bank, United Overseas Bank, OCBC Bank and Overseas Union Bank and 0 otherwise.
287
7.5.3 Alternative models
In line with the discussion in section 7.4.3, this section examines the significance of the
five additional board variables on the long-run performance of the sample IPOs. Table
7.30 presents the descriptive statistics and correlation matrix for the long-run
performance and four board variables. The Pearson correlations on the upper half of
Table 7.30 show there is no significant correlation between these board variables and
IPO performance over two years. However, when the analysis extends to three years, it
shows that there is a positive correlation between board size and long-run performance,
significant at the 5% level. It is also observed that board size is significantly and
negatively associated with board independence at the 1% level. In addition, board
independence is negatively associated with family members on board at the 1% level.
Further, there is a significant positive correlation between female directorship and
family members on the board at a 1% level. These results are qualitatively similar to the
Spearman rank order correlations presented in the lower triangular half.
288
7.30: Descriptive statistics and correlations for board structure and post-IPO long-run performance regression variables
N = 391
Mean
Median
Min
Max
SD
1
2
3
4
5
6
1. BHAR24
-0.45
-0.50
-4.69
2.98
0.73
1.00
0.70**
0.07
-0.05
0.07
0.03
2. BHAR36
-0.64
-0.64
-4.61
3.33
0.77
0.80**
1.00
0.13*
-0.10
0.02
0.04
3. BSize
6.54
6.00
4.00
23.00
1.73
0.10
0.13**
1.00
-0.25**
-0.07
-0.05
4. IndepDir%
0.40
0.40
0.20
0.82
0.10
-0.09
-0.13**
-0.33**
1.00
-0.01
-0.14**
5. Female%
0.07
0.00
0.00
0.60
0.11
0.07
0.05
-0.05
0.01
1.00
0.28**
6. Family%
0.19
0.00
0.00
0.78
0.22
0.06
0.06
-0.02
-0.13**
0.31**
1.00
*Correlation is significant at the 5% level (2-tailed). **Correlation is significant at the 1% level (2-tailed). Pearson correlations are found at the upper triangular half of the table and Spearman rank order correlation for the lower triangular half of the table. BHAR24 is the equal-weighted returns of the buy-and-hold abnormal returns over the event-window period [+1, +24], defined in months relative to the listing month. BHAR36 is equal-weighted returns of the buy-and-hold abnormal returns over the event-window period [+1, +36]. UPrice is measured by the market adjusted initial returns, which is the raw initial returns adjusted for returns to the STI Index. BSize is measured by the total number of directors on the board. IndepDir% is measured by the percentage of independent directors on the board. Female% is measured by the percentage of female directors on the board. Family% is measured by the percentage of family members on the board.
289
Table 7.31 compares the board structure characteristics between two groups of issuers:
one group with positive market adjusted initial returns and the other with negative
market adjusted returns, using the Mann-Whitney U Test. Panel A divides IPOs into
two groups based on equal-weighted buy-and-hold returns over a two-year holding
period, while B separates the IPOs using returns over a three-year period.
Panel A shows there is essentially no significant difference between these two groups of
IPOs in relation to board size, percentage of independent directors, percentage of female
directors, and percentage of family members on the boards. However, Panel B shows
that better performed IPOs have a larger board size than those firms reporting negative
long-run returns over a three-year period, at a 10% significance level. There is no
significant difference in the remaining three board variables between the two groups of
IPOs. This is also consistent with the findings gathered by Lin (2005), where she
gathers that board size is significantly associated with long-run performance of
Australian IPOs but not for board independence.
290
Table 7.31: Univariate tests of differences in board structure between firms with
positive and negative long-run returns
Panel A: [+1, +24]
N
BHAR24
BSize
IndepDir%
Female%
Family%
Positive
initial return
Mean Median Negative
initial return
Mean Median
Sample
differences
Mann-Whitney Z Asymp. Sig.
70
321
0.630
0.423
-0.691
-0.609
-13.114
(0.000) ***
6.643
6.000
6.523
6.000
-0.282
(0.778)
0.396
0.400
0.401
0.400
-0.653
(0.514)
0.078
0.000
0.072
0.000
-0.150
(0.881)
0.190
0.000
0.192
0.236
-0.083
(0.934)
Panel B: [+1, +36]
N
BHAR36
BSize
IndepDir%
Female%
Family%
Positive
initial return
Mean Median Negative
initial return
Mean Median
Sample
differences
Mann-Whitney Z Asymp. Sig.
47
344
0.691
0.432
-0.827
-0.688
-11.124
(0.000) ***
7.021
6.000
6.480
6.000
-1.743
(0.081) *
0.387
0.375
0.402
0.400
-1.309
(0.191)
0.178
0.000
0.194
0.000
-0.612
(0.540)
0.080
0.000
0.072
0.000
-0.098
(0.922)
*Correlation is significant at the 10% level (2-tailed). **Correlation is significant at the 5% level (2-tailed). ***Correlation is significant at the 1% level (2-tailed). Panel A divides sample firms into two groups based on equal-weighted returns of the buy-and-hold abnormal returns over the event-window period [+1, +24]. Panel B divides sample firms into two groups based on equal-weighted returns of the buy-and-hold abnormal returns over the event-window period [+1, +36]. BSize is measured by the total number of directors on the board. IndepDir% is measured by the percentage of independent directors on the board. Female% is measured by the percentage of female directors on the board. Family% is measured by the percentage of family members on the board.
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Table 7.32 presents the hierarchical regression results for the long-run performance of
IPOs, measured by the equal weighted buy-and-hold adjusted returns over two years
(Panel A) and three years (Panel B) after listing. Models 1-3 present the results for all
the test variables and control variables covered in this study. Specifically, Model 1
presents the regression results employing only the control variables, including
underpricing. Model 2 regresses the long-run returns using the three test variables:
listing, VC-backed and lock-up period. Model 3 includes the five new board variables in
the alternative model. Models 4-9 are the additional robustness tests employed, whereby
Model 4 excludes the board size variable, Model 5 excludes board independence, Model
6 excludes the female directorship variable, Model 7 excludes the family members on
the board variable, Model 8 excludes the firm size variable, and Model 9 excludes the
offer size variable. The results observed from these models in both Panels are discussed
below. Due to the similarities of the results gathered here and those discussed under
section 7.5.2, the focus will be on the results obtained relating to the five additional
variables and other key variables that show a significant relationship with long-run
performances.
Lock-up period
In the previous section, it is observed that there is no significant relationship between
lock-up period and long-run performance. However, Table 7.30 shows that lock-up
period is positively associated with long-run performance, significant at the 5% and
10% level for two-year and three-year post-IPO performance respectively. Thus, it
suggests that a longer lock-up period may give rise to better long-run performance. This
observation is contrary to those gathered by Ritter and Welch (2002) and Purnanandam
and Swaminathan (2004), where they argue that the long-run performance deteriorates
after the lock-up period expires. It is believed that lock-up arrangements mitigate moral
292
hazard and a longer lock-up period would act as a bonding mechanism to show
commitment by the owners to reduce subsequent underperformance (Brav & Gompers
2003; Yung & Zender 2010). It may also signal the quality of the IPO firm that leads
investors to invest in these firms (Leland & Pyle 1977; Courteau 1995; Ahmad 2012).
This result is consistent with the views obtained from the interviewees covered in the
previous chapter where many feel that IPOs with a longer lock-up period should report
better performance.
Board variables
Panels A and B in Table 7.32 reveal that there is no significant relationship between the
additional board variables and long-run performance of the sample IPOs. This may
imply that the long-run performance of the IPOs could be driven more by factors other
than board variables. This result is also consistent with the earlier model where the CGI
is included in the analysis. In addition, the findings are also similar to those reported by
Lin (2005), where she concludes that apart from board size and other board variables,
such as CEO duality and board independence, have no significance to the long-run
performance of IPOs in Australia.
Control variables
Table 7.32 shows that the regression coefficients for underpricing is positive and
significant at 1% in all the models in Panel A, suggesting that issuers are reporting a
higher level of underpricing to show better performance two years after listing. This
variable remains positively significant at 1% and 5% when the analysis extends to three
years after listing. This result differs from the results gathered by Lee, Taylor and
Walter (1996b), where they conclude that although there is a positive relationship
between underpricing and long-run performance of IPOs it is not significant. The
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difference could be because the study conducted by Lee, Taylor and Walter (1996b) was
between 1973 and 1992, when the stock exchange was regulated by two separate bodies
(Stock Exchange of Singapore (SES) and Singapore International Monetary Exchange
(SIMEX)) and the regulations and listing rules were different from what SGX has
implemented during the period of this study. This includes regulations such as having
two board listings, more stringent regulations on foreign listings, and inclusion of
corporate governance disclosure for listed companies. In addition, Lee, Taylor and
Walter (1996b) do not include many of the significant variables discussed in this study
such as board listing, lock-up period, industry effects, earnings forecasts, underwriter
reputation, CGI, and other board variables. Most of these variables provide some
explanatory power to the results gathered in this study. Further, the sample size
employed in this study is more than three times of what Lee, Taylor and Walter (1996b)
examined.
Contrary to the findings reported in Table 7.29, Table 7.32 shows a positive relationship
between offer size and long-run performance at a 10% significant level for Models 4
and 6, and at a 1% significant level for Model 1 in Panel A. This positive relationship is
more telling for the three-year post-IPO performance where its significance varies from
1% to 5% for all models. This may suggest that issuers with a larger offer size signal to
investors that the amount raised could be utilised for larger projects that may yield a
higher return. The findings differ from those gathered by Lee, Taylor and Walter
(1996b), where they concluded there is no significant relationship between offer size
and long-run performance. One possible explanation for the difference is that Lee,
Taylor and Walter (1996b) employ only seven control variables in their study and only
the coefficient for oversubscription shows a significant association with long-run
performance. Another possible reason for the difference is that Lee, Taylor and Walter
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(1996b) use market adjusted wealth relative to measure long-run performance in their
study as opposed to BHAR employed in this study. In addition, the wealth relatives
used in their period of study were not adjusted for dividends, as dividend-adjusted
market index did not exist when the stock market was regulated by SES. On the other
hand, the STI employed in this study is based on dividend-adjusted market index.
It is also observed that industry effects have a significant impact (at 1%) on long-run
performance for both two and three years after listing. In addition, Table 7.32 shows
that IPOs providing an earnings forecast perform better in the long-run. It is also noted
that issuers with a higher equity retention by owners report favourable long-run
performance.
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Table 7.32: Pooled OLS regression of board structure and IPO firm characteristics on the long-run performance of IPOs
Panel A: [+1, +24]
Exp
Sign
Models
Variable (1) (2) (3) (4) (5) (6) (7) (8) (9)
Listing + 0.117* 0.114* 0.115* 0.118** 0.109 0.116* 0.108 0.171*** (1.803) (1.719) (1.746) (1.800) (1.645) (1.751) (1.633) (3.055) VC-backed + 0.039 0.041 0.041 0.044 0.042 0.037 0.037 0.052 (0.791) (0.800) (0.801) (0.880) (0.818) (0.741) (0.733) (1.035) Lock-up + 0.119** 0.116** 0.116** 0.118** 0.114** 0.116** 0.112** 0.119** (2.313) (2.227) (2.231) (2.281) (2.195) (2.236) (2.153) (2.289) BSize + -0.004 0.008 -0.007 -0.005 0.000 0.025 Leader IndepDir% Female% Family%
-
+
+
+
(-0.065) -0.015 (-0.287) -0.032 (-0.601) 0.065 (1.284) 0.207
-0.015 (-0.303) -0.031 (-0.615) 0.066 (1.289) 0.027
(0.141) -0.014 (-0.277)
0.065 (1.278) 0.032
(-0.118) -0.020 (-0.392) -0.031 (-0.586)
0.047
(-0.079) -0.015 (-0.298) -0.036 (-0.680) 0.073 (1.490)
(0.001) -0.013 (-0.253) -0.031 (-0.573) 0.061 (1.208) 0.034
(0.448) -0.013 (-0.246) -0.016 (-0.306) 0.070 (1.379) 0.016
(0.514) (0.517) (0.604) (0.913) (0.632) (0.303) UPrice - 0.214*** 0.202*** 0.202*** 0.202*** 0.203*** 0.206*** 0.198*** 0.203*** 0.197*** (4.369) (4.119) (4.057) (4.067) (4.100) (4.154) (4.028) (4.074) (3.958) Age + 0.057 0.060 0.057 0.057 0.057 0.057 0.058 0.055 0.059 (1.148) (1.207) (1.151) (1.151) (1.151) (1.154) (1.168) (1.098) (1.177) LnFSize + 0.056 0.072 0.074 0.074 0.073 0.069 0.077 0.119** (0.919) (1.188) (1.205) (1.205) (1.192) (1.124) (1.261) (2.189) LnOSize + 0.176*** 0.115 0.131 0.129* 0.122 0.137* 0.125 0.177 (2.746) (1.499) (1.585) (1.648) (1.500) (1.665) (1.531) (2.421) TGap + 0.051 -0.047 -0.043 -0.043 -0.043 -0.046 -0.043 -0.051 -0.030 (-1.031) (-0.955) (-0.862) (-0.862) (-0.858) (-0.913) (-0.870) (-1.033) (-0.605) Industry - -0.143*** -0.156*** -0.149*** -0.149*** -0.148*** -0.150*** -0.152*** -0.146*** -0.154*** (-2.856) (-3.065) (-2.896) (-2.902) (-2.881) (-2.919) (-2.971) (-2.837) (-2.983) EForecast + 0.094* 0.097** 0.090* 0.090* 0.095* 0.088* 0.091* 0.092* 0.092* (1.910) (1.995) (1.815) (1.821) (1.926) (1.770) (1.844) (1.847) (1.849)
296
REquity + 0.104* 0.104* 0.104* 0.104* 0.105** 0.101** 0.105* 0.101* 0.086 (1.942) (1.952) (1.958) (1.951) (1.970) (1.887) (1.961) (1.890) (1.641) Underwriter - 0.039 0.014 0.008 0.008 0.008 0.011 0.009 0.007 0.008 (0.790) (0.285) (0.158) (0.150) (0.152) (0.213) (0.168) (0.142) (0.159) Constant -2.324*** -2.389*** -2.420*** -2.422*** -2.513*** -2.372*** -2.374*** -2.330*** -1.940*** Adjusted R2 0.088 0.098 0.094 0.096 0.095 0.092 0.096 0.093 0.090 F-stat 5.180*** 4.540*** 3.376*** 3.597*** 3.571*** 3.478*** 3.578*** 3.492*** 3.416*** N = 391
***Significant at 1% level. **Significant at 5% level. *Significant at 10% level. Numbers in parentheses are t-statistics. UPrice is measured by market adjusted initial return, which is the raw initial returns adjusted for returns to the STI Index. Listing is coded as 1 if issuer is listed on Main Board of SGX and 0 if it is listed on SESDAQ. VC-backed is coded as 1 if issuer is backed by a venture capitalist and 0 otherwise. Lock-up is measured by the number of months the owners have pledged not to dispose of any of their shares from the date of listing. BSize is measured by the total number of directors on the board. Leader is coded as 1 if the Chairman and CEO positions are held by different persons and 0 otherwise. IndepDir% is measured by the percentage of independent directors on the board. Female% is measured by the percentage of female directors on the board. Family% is measured by the percentage of family members on the board. Age is the number of years the issuer has been in operation prior to listing. LnFSize is measured by the natural log of the total assets prior to listing. LnOSize is measured by the natural log of the product of offer price and the total number of shares offered. TGap is measured by the number of days from the date of the prospectus and the first trading date. Industry is coded as 1 if IPO falls under the manufacturing, services, construction, properties, hotels/restaurants and finance sectors, and 0 otherwise. EForecast is coded as 1 if IPO provides earnings forecast in the prospectus and 0 otherwise. Industry is coded as 1 if IPO falls under the following industries: manufacturing, services, construction, properties, hotels/restaurants, and finance and 0 otherwise. REquity is measured by the proportion of shares (excluding options) held directly and indirectly by owners immediately after listing. REquity2 is the square of equity ownership by owners. Underwriter is coded 1 if the IPO is underwritten by one of the following banks: DBS Bank, United Overseas Bank, OCBC Bank and Overseas Union Bank and 0 otherwise.
297
Panel B: [+1, +36]
Exp
Sign
Models
Variable (1) (2) (3) (4) (5) (6) (7) (8) (9)
Listing + 0.053 0.046 0.043 0.056 0.045 0.049 0.042 0.126** (0.797) (0.692) (0.641) (0.847) (0.679) (0.736) (0.633) (2.230) VC-backed + 0.058 0.053 0.053 0.062 0.054 0.048 0.051 0.070 (1.143) (1.040) (1.041) (1.209) (1.045) (0.951) (0.995) (1.362) Lock-up + 0.092* 0.087* 0.087* 0.093* 0.087* 0.088* 0.085 0.092* (1.771) (1.666) (1.660) (1.771) (1.662) (1.677) (1.617) (1.749) BSize + 0.025 0.050 0.024 0.024 0.028 0.065 Leader IndepDir% Female% Family%
-
+
+
+
(0.427) 0.014 (0.265) -0.072 (-1.326) 0.014 (0.267) 0.041
0.017 (0.344) -0.079 (-1.555) 0.013 (0.250) 0.041
(0.914) 0.015 (0.289)
0.013 (0.251) 0.051
(0.417) 0.012 (0.244) -0.072 (-1.325)
0.045
(0.407) 0.013 (0.249) -0.078 -1.447) 0.025 (0.504)
(0.473) 0.015 (0.288) -0.071 (-1.307) 0.011 (0.214) 0.046
(1.164) 0.016 (0.319) -0.049 (-0.920) 0.021 (0.399) 0.025
(0.769) (0.759) (0.961) (0.881) (0.853) (0.473) UPrice - 0.134*** 0.127*** 0.129** 0.128** 0.133*** 0.130*** 0.124** 0.130*** 0.122** (2.708) (2.562) (2.570) (2.560) (2.645) (2.598) (2.494) (2.585) (2.425) Age + 0.040 0.041 0.037 0.038 0.037 0.037 0.038 0.035 0.039 (0.791) (0.808) (0.741) (0.761) (0.738) (0.743) (0.765) (0.705) (0.775) LnFSize + 0.045 0.058 0.052 0.053 0.050 0.051 0.056 0.115** (0.741) (0.943) (0.832) (0.858) (0.800) (0.818) (0.910) (2.088) LnOSize + 0.202*** 0.174** 0.185** 0.196** 0.164** 0.186** 0.176** 0.217*** (3.117) (2.236) (2.207) (2.464) (1.990) (2.230) (2.124) (2.931) TGap + -0.047 -0.044 -0.042 -0.043 -0.042 -0.043 -0.043 -0.048 -0.024 (-0.928) (-0.885) (-0.838) (-0.858) (-0.825) (-0.850) (-0.849) (-0.958) (-0.473) Industry - -0.142*** -0.154*** -0.147*** -0.149*** -0.145*** -0.147*** -0.151*** -0.145*** -0.154*** (-2.824) (-2.996) (-2.826) (-2.865) (-2.783) (-2.835) (-2.927) (-2.789) (-2.939) EForecast + 0.124** 0.127** 0.115** 0.114** 0.125** 0.115** 0.117** 0.116** 0.118** (2.504) (2.562) (2.289) (2.276) (2.509) (2.284) (2.331) (2.313) (2.330) REquity + 0.099* 0.098* 0.092* 0.094* 0.095* 0.092* 0.093* 0.090* 0.066 (1.844) (1.822) (1.705) (1.738) (1.747) (1.697) (1.722) (1.667) (1.251) Underwriter - 0.026 0.010 0.002 0.006 0.002 0.003 0.003 0.002 0.003 (0.523) (0.198) (0.048) (0.115) (0.035) (0.059) (0.063) (0.037) (0.048)
298
Constant -2.661*** -2.788*** -2.660*** -2.646*** -2.878*** -2.649*** -2.586*** -2.594*** -1.950*** Adjusted R2 0.072 0.075 0.073 0.075 0.071 0.075 0.074 0.073 0.063 F-stat 4.348*** 3.640*** 2.796*** 2.966*** 2.855*** 2.974*** 2.937*** 2.930*** 2.639*** N = 391
***Significant at 1% level. **Significant at 5% level. *Significant at 10% level. Numbers in parentheses are t-statistics. UPrice is measured by market adjusted initial return, which is the raw initial returns adjusted for returns to the STI Index. Listing is coded as 1 if issuer is listed on Main Board of SGX and 0 if it is listed on SESDAQ. VC-backed is coded as 1 if issuer is backed by a venture capitalist and 0 otherwise. Lock-up is measured by the number of months the owners have pledged not to dispose of any of their shares from the date of listing. BSize is measured by the total number of directors on the board. Leader is coded as 1 if the Chairman and CEO positions are held by different persons and 0 otherwise. IndepDir% is measured by the percentage of independent directors on the board. Female% is measured by the percentage of female directors on the board. Family% is measured by the percentage of family members on the board. Age is the number of years the issuer has been in operation prior to listing. LnFSize is measured by the natural log of the total assets prior to listing. LnOSize is measured by the natural log of the product of offer price and the total number of shares offered. TGap is measured by the number of days from the date of the prospectus and the first trading date. Industry is coded as 1 if IPO falls under the manufacturing, services, construction, properties, hotels/restaurants and finance sectors, and 0 otherwise. EForecast is coded as 1 if IPO provides earnings forecast in the prospectus and 0 otherwise. Industry is coded as 1 if IPO falls under the following industries: manufacturing, services, construction, properties, hotels/restaurants, and finance and 0 otherwise. REquity is measured by the proportion of shares (excluding options) held directly and indirectly by owners immediately after listing. REquity2 is the square of equity ownership by owners. Underwriter is coded 1 if the IPO is underwritten by one of the following banks: DBS Bank, United Overseas Bank, OCBC Bank and Overseas Union Bank and 0 otherwise.
299
7.6 Summary
This chapter examines whether IPO firms with better corporate governance practices are
associated with lower IPO underpricing and better long-run performance, with the
initial model of employing CGI and an alternative model whereby specific board
variables such as board size, CEO duality, board independence, female directors, and
family members on the board were included. In addition, it also examines whether the
degree of underpricing and long-run performance are associated with board listing, VC-
backed, and lock-up period.
Main Board-listed IPOs are found to have a higher level of underpricing and reported
better performance in the long-run, especially two years after listing when compared to
their counterparts listed on the SESDAQ. However, for returns of three years after
listing, there is no evidence of significant difference among these IPOs on the two
boards. Thus, hypothesis H1a is supported, while hypothesis H1b is supported for two
years post-listing but not for three years.
In relation to corporate governance practices, there is no evidence to show that IPOs
with higher CGI reported a lower level of underpricing. Contrary to general expectation,
the results show that issuers with higher CGI reported a lower level of long-run
performance. Thus, it is concluded that this study finds no support for the signalling and
ex ante uncertainty hypotheses; therefore, both hypotheses H2a and H2b are rejected.
One important signal of IPO quality is the involvement of VCs, where the
certification/monitoring model has attracted many scholars to examine the impact of
VC-backed IPOs on the level of underpricing and long-run performance. This study
finds no explanatory power that VC-backed IPOs reported a lower level of underpricing
300
and better long-run performance compared to non VC-backed IPOs. Thus, both
hypotheses H3a and H3b lack any supportive evidence and are rejected.
With regard to lock-up period, the findings gathered in this study do not lend support to
the hypothesis that issuers with a longer lock-up period reports a lower level of
underpricing. Thus, hypothesis H4a is rejected. In relation to long-run performance,
there was no evidence indicating a positive relationship between lock-up period and
long-run performance. Thus, hypothesis H4b is rejected. However, when the alternative
model is employed, lock-up period is significantly positively associated with long-run
performance for both two years and three years after listing. Hence, the results reported
in the alternative model lend support to hypothesis H4b.
In order to extend the discussion on the impact of corporate governance of IPO
performances, an alternative model incorporating five board variables is employed.
While there is no evidence to suggest that board size (H5a and H5b), CEO duality (H6a
and H6b), board independence (H7a and H7b) and involvement of female directors
(H8a and H8b) are negatively associated with underpricing and positively associated
with long-run performance of the sampled IPOs, a significant negative relationship
exists between involvement of family members on the board (H9a) and underpricing.
However, there is no supportive evidence for long-run performance on family members’
involvement (H9b). In sum, the study shows that apart from a significant association
between involvement of family members on the board and level of underpricing, there is
no evidence to suggest that better corporate governance practices are associated with
lower underpricing and better long-run performance.
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In relation to the control variables, this study finds that there is a significant negative
association between underwriter reputation and underpricing, suggesting that issuers
underwritten by reputable underwriters experience a lower level of ex ante uncertainty
and are thus less underpriced. However, there is no evidence suggesting underwriter
reputation is associated with long-run performance of the sampled IPOs.
In relation to long-run performances, firm size is significantly negatively associated
with post-IPO long-run performance two years after listing. However, for three years
after listing, it is not a significant variable. In addition, this variable loses its explanatory
power when the alternative model is employed.
Offer size is negatively associated with long-run performance in the initial model.
However, when the analysis extends to the alternative model, it shows that offer size is
positively associated with post-IPO performance, three years after listing. This study
also reports that there is evidence to suggest that earnings forecast is positively
associated with long-run performance, in both the initial and alternative models.
The alternative model also provides evidence that both underpricing and equity
retention by owners are significantly positively associated with long-run performance.
Further, the alternative model reveals that issuers operating under the manufacturing,
services, construction, properties, hotels/restaurants, and finance sectors reported
significantly poorer post-IPO performance compared to their counterparts from other
sectors.
302
303
Chapter 8
Conclusion
8.1 Introduction
This final chapter of the thesis contains an overall summary of the study and its
conclusion. The chapter is organized as follows: sections 8.2 and 8.3 summarise the
qualitative and quantitative findings gathered from Chapters 6 and 7 respectively.
Section 8.4 discusses the contribution of this study to the existing research in corporate
governance and IPO performance. Section 8.5 outlines the practical implications of the
study. Section 8.6 highlights some of the limitations of the study in relation to both the
qualitative and quantitative approaches. Section 8.7 provides some directions for future
research, and section 8.8 concludes the thesis.
8.2 Qualitative findings summary
In the qualitative research phase, questions posed to the 30 interviewees can be
categorised into two major groups: general and specific. General questions include the
definition of corporate governance, a distinction between good and bad corporate
governance practices, and how corporate governance affects a firm’s short-run and
long-term performances. Specific questions include the importance of board structure,
such as board size, board composition, CEO duality, ownership and director ownership,
and construction of CGI.
Interviewees from the Issuers group shared their views on the reasons for listing,
selection of advisers for IPOs, and the challenges they faced after the IPO. These
practical insights not only complement the quantitative results discussed in Chapter 7,
but may serve as a reference point for prospective IPO Issuers. The bankers and
304
underwriters under the Underwriters group offered their professional views pertaining to
areas such as the performance of the Main Board and the Second Board IPOs,
underwriters’ reputations, the relationship between underwriters and investors, the role
of VCs, and the impact of lock-up agreements and the lock-up period on IPO
performances. Such views that are specific to the Singapore stock market will be
beneficial to existing and prospective investors of IPO firms.
Essentially, most interviewees see a weak or no relationship between corporate
governance and IPO performance in the short-run. Many of these interviewees,
especially the investors, feel that corporate governance is merely a compliance exercise
and does not provide any significant impact on IPO performance. They further assert
that the general economic outlook and stock market performance at the time of listing
would be more critical in affecting the IPO performance in the short-run. However, all
interviewees agreed that there is a positive association between corporate governance
and the long-run performance of IPOs. Specifically, some interviewees believe that
management see good corporate governance practices as a positive signal to investors
and other stakeholders that the firm is committed to complying with the Code to protect
the interests of all stakeholders. Thus, this compliance, including the appointment of
independent directors and separation of CEO and Chairman roles, may align the
interests of insiders and outsiders to ensure the firm remains stable and enhances
stronger business growth in the long-run. This will translate to higher shareholder value
and boost the confidence of investors to invest further in the firm.
The views relating to the board listing and performance are rather mixed. Some
interviewees feel that there is essentially no difference in performance between firms
listed on the Main Board and those listed on the SESDAQ. They contend that firms
305
listed on these two boards apply similar valuation techniques, and investors have other
investment criteria not associated with the listing status when investing in IPOs. In
contrast, more than half of the Underwriters argue that the Main Board-listed IPOs are
perceived as less risky and better quality as they generally have a longer operating
history and are subject to more stringent criteria. Thus, they find that the Main Board-
listed IPOs should perform better in the long-run compared to their counterparts listed
on the SESDAQ.
More than half of the interviewees believe that IPOs with larger boards should perform
better in light of the good mix of skills and experiences among the independent
directors. Those with separate roles of CEO and Chairman and a higher level of
director ownership after listing should also perform better. Concern was expressed over
directors holding multiple directorships as the demands of these directorships could be
excessive.
The Underwriters maintained that VC backing and lock-up period have a positive
impact on IPO performance. Specifically, they contend that IPOs that are VC-backed
and with a longer lock-up period provide a clear signal to investors about the quality of
the IPO. They believe that VCs perform an independent role in monitoring the
performance of the management and also to ensure these IPOs establish sound corporate
governance practices. Further, they argue that lock-up agreements ensure owners are
committed not to dispose of their shareholding during their lock-up period and to signal
to outsiders that they are committed to the IPO performance in both the short-term and
long-run.
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Most of the interviewees offered constructive comments pertaining to the items found in
the initial CGI and their views were considered in revising the CGI, which is believed to
be more suitable to addressing the corporate governance issues for Singapore IPOs.
Specifically, the revised CGI, which is comprised of 55 items instead of the 60 items
found in the original CGI, is employed as one of the quantitative tools to measure IPO
firms’ performance.
8.3 Quantitative results summary
The findings from the quantitative research phase suggest that the Main Board-listed
IPOs report a higher level of underpricing and better long-run performance, especially
two years after listing, compared to the SESDAQ-listed IPOs. In regards to corporate
governance practices, using CGI as a proxy for the quality of disclosure, the study does
not lend support to the signalling and ex ante uncertainty hypotheses as the findings do
not suggest that issuers with higher CGI scores report lower levels of underpricing and
better long-run performance. In addition, this study does not support the
certification/monitoring model as it does not offer any explanatory power that VC-
backed IPOs reported lower levels of underpricing and better long-run performance
compared to non VC-backed IPOs. In addition, this study does not lend support to the
hypothesis that issuers with a longer lock-up period report lower levels of underpricing
and better long-run performance. However, when specific board variables are examined
in the regression models, lock-up period is significantly positively associated with long-
run performance.
In addition to employing a composite CGI, this study examines specific board variables
such as board size, CEO duality, board independence, gender diversity, and family
directorship to investigate the relationship between these variables and IPO
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performance. The findings reveal that apart from a significant association between
involvement of family members on the board and level of underpricing, there is no
evidence to suggest that other board variables are associated with lower underpricing
and better long-run performance.
When analysing the numerous control variables employed in this study, the results show
a significant and negative association between underwriter reputation and IPO
underpricing, which suggests that issuers underwritten by reputable underwriters
experience a lower level of ex ante uncertainty and thus report a lower level of
underpricing, which is in line with prior studies (Logue 1973; Neuberger & Hammond
1974; Beatty & Ritter 1986; How, Izan & Monroe 1995; Higgins & Gulati 1999; Li &
Masulis 2004). In terms of long-run performance, the results show a significant and
negative association between underpricing, firm size, offer size and long-run
performance, but a positive relationship between earnings forecast and long-run
performance. This suggests that issuers that report lower initial returns, have lower total
assets prior to listing, raise lower amount of proceeds at IPO, and provide an earnings
forecasts disclosure that tends to show better long-run performance. The regression
models that include specific board variables show a positive association between
underpricing, offer size earnings forecast, equity retention and long-run performance,
and a negative relationship between industry effects and post-IPO performance.
Possible reasons for the difference in results with the earlier study conducted by Lee,
Taylor and Walter (1996b) include changes in the stock exchange regulation in
Singapore between the two sample periods examined, different control variables used,
and a different methodology used in measuring the long-run performance of IPOs.
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8.4 Research contributions
This study offers several new contributions and extensions to the extant literature on
corporate governance and IPO performance. Firstly, it appears to be the only study that
employs both qualitative and quantitative approaches in examining the association
between corporate governance and IPO performance. Specifically, the qualitative
findings obtained from 30 interviewees with issuers, underwriters and investors provide
practical insights on the importance of corporate governance and their potential impact
on the performance of IPOs in Singapore. This primary source of information allowed
the initial CGI to be revised based on their views before it was employed as a proxy for
the quality of corporate governance in the quantitative phase of the study. The corporate
governance data gathered from the sample 391 IPO prospectus and the market
information (share price and stock market index) obtained from SGX and other premier
websites (Bloomberg and Yahoo Finance) in the quantitative phase offer, for the first
time, direct evidence on the association between corporate governance practices and
IPO performance in Singapore. Thus, the combination of primary and secondary
sources enhances the quality of the findings gathered, which offer several practical
implications for issuers, investors and regulatory bodies, as discussed in the next
section.
Secondly, this study integrates two heavily researched areas in corporate finance
(corporate governance and IPO performance), which in combination have received
insufficient attention internationally to date. Previous studies in Singapore have either
covered IPO performance (e.g. Koh & Walter 1989; Saunders & Lim 1990; Lam &
Chang 1994; Lee, Taylor & Walter 1996b; Firth & Liau-Tan 1997; Eng & Aw 2000;
Wang, Wang & Lu 2003; Chong & Ho 2007) or examined the relationship between
corporate governance and existing listed firms in Singapore (e.g. Mak & Li 2001; Pei
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2012). As mentioned in Chapter 1, the only study that has examined the relationship
between the two in Singapore is by Mak et al. (2002). However, the study does not
analyse the Main Board and SESDAQ-listed IPOs separately. In addition, it does not
cover Singapore IPO performance in the long-run and does not employ any composite
governance index in measuring the quality of corporate governance disclosure.
Therefore, this study appears to be the first and only study to examine the association
between corporate governance, employing both CGI and specific board variables, and
initial returns and long-run performance of Main Board and SESDAQ-listed IPOs. In
this study, the revised CGI in measuring IPO performance is arguably a better measure
of corporate governance compared to individual elements of governance structure, as an
aggregate score incorporates the impact of multiple governance elements and also takes
into account various trade-offs among the individual elements (Luo 2006).
Thirdly, this study contributes to the signalling and agency theories because it appears
to be the first research to focus on the association between gender diversity and
involvement of family members on boards and IPO performance in Singapore. Another
important contribution of this thesis is that it includes the involvement of both VCs and
lock-up period in examining IPO performance in Singapore. Previously, the only study
that has dealt with VC involvement for Singapore IPOs was conducted by Wang, Wang
and Lu (2003) and the only research paper that has included lock-up period for
Singapore IPOs was by Chong and Ho (2007), though their focus is on accuracy of
earnings forecasts and not on underpricing and post-IPO performances. Finally, this
study has made a reasonable attempt to extend and provide an update on the previous
IPO studies in Singapore. Specifically, it covers not only corporate governance, VC-
backing and lock-period, but also includes numerous firm specific control variables
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such as a firm’s operating history, firm size, offer size, time gap to listing, industry
groups, earnings forecast, equity retention, and reputation of underwriters.
8.5 Implications of the study
The findings of the study provide several practical implications to issuers, investors, and
regulatory bodies who are the major stakeholders of IPOs in Singapore. The
implications will be discussed in detail for each of the stakeholder groups below.
8.5.1 Managerial implications
Most interviewees in this study feel that corporate governance may have an impact to
the IPO firm’s long-run performance, but not the initial returns. Interestingly, the
quantitative findings from this study have shown that corporate governance on the
whole, as measured by CGI, as well as specific board variables, do not provide
significant explanatory power on IPO performance in Singapore. Thus, these findings
may cast doubt on future IPO issuers over whether there is a need to place more
emphasis on the compliance to the provisions of the corporate governance when they
intend to seek listing on SGX.
One significant finding from this study is that an underwriter’s reputation has a positive
association with the initial returns of IPOs, but not on the post-IPO performance. Thus,
for prospective issuers seeking listing on SGX in future, they may take into
consideration the reputation of the financial institutions before they are appointed as
underwriters for the IPO. It is also important to highlight that this study does not lend
support to the hypotheses that VC-backed IPOs report lower underpricing and better
long-run performance than non VC-backed IPOs. This result may suggest to managers
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that although venture capitalists may be considered as a source of finance to the firm’s
investment projects, they have no significant impact on IPO performance.
8.5.2 Investment implications
This study has shed some light on the degree of underpricing of IPOs in Singapore.
Specifically, the sample IPOs in this study generate an average of market adjusted
initial returns (MAIR) of 20.38%, which is lower than the earlier IPO studies in
Singapore (e.g. Wong & Chiang 1986; Lee, Taylor & Walter 1996b; Uddin 2008).
Thus, the results gathered in this study allow investors who wish to take advantage of
IPO underpricing to realise that the ‘amount of money left on the table’ is not as
lucrative as in the past. Thus, they may have to be more cautious when making IPO
investments.
This study reveals that the sample IPOs report a negative long-run performance
throughout the three years after listing, measured by both CAR and BHAR. The results
also show a declined wealth relative over the three years after listing. Specifically, IPOs
listed on the SESDAQ report a poorer long-run performance than the Main Board-listed
IPOs. Further, this study shows that IPOs from all sectors, other than hotels/restaurants
and multi-industry, generate negative long-run CARs and BHARs. Thus, investors
should be wary when making long-term investments in IPOs in Singapore.
The qualitative findings from this study also permit investors to understand how other
investors perceive the importance of corporate governance in IPO performance, albeit
these findings may not represent the views of all investors in Singapore and also do not
lend support to the results obtained in the quantitative phase. Beyond these, this study
supports the signalling and ex ante uncertainty hypotheses when it comes to
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underwriters’ reputation, as results from this study shows that it is a significant
contributory factor to IPO underpricing. Thus, investors may wish to pay more attention
to this element when making an IPO investment decision.
8.5.3 Regulatory implications
In essence, effective corporate governance mechanisms should look after the interest of
the stakeholders of listed firms, and regulatory bodies play a critical role in ensuring
that SGX listed firms comply with the Code of Corporate Governance (‘Code’) . In
view of the ongoing changes in government regulations pertaining to corporate
governance policies and stock exchange listing requirements, regulatory bodies such as
SGX, MAS and SIAS need to be aware of the attributes associated with short-term and
long-run success of IPOs to advise issuers and investors of IPOs on the importance of
corporate governance. With the recently revised Code of Corporate Governance
introduced by MAS, which is valid for listed firms having a financial year end
commencing 1 November 2012, the quality of compliance to the listing firms’ and
IPOs’ long-run performance have yet to be seen. Nevertheless, due to the ‘comply or
explain’ approach adopted MAS in the previous and revised codes, this study shows
that the level of compliance varies among firms listed on the Main Board and the
SESDAQ, and also across different industries. Thus, it may be critical for SGX to
closely monitor existing firms as well as newly listed IPOs so that they comply with the
revised Code and to ensure that they provide detail explanations with justifications for
any departure of the provisions spelt out in the revised Code.
As mentioned in the previous chapter, there is an increasing awareness of the weak
presence of female directors on boards in Singapore. Though this study does not show
any significant association between gender diversity and IPO performance, the recent
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study by CGIO (2013) finds that SGX-listed firms having female board representation
report better ROA and ROI than their counterparts with no female board representation.
Thus, it may be good for regulators and scholars to conduct further research on the
significance of gender diversity on the performance of IPOs listed after 2007.
8.6 Limitations of the study
The results and implications of this study should be considered in the context of several
limitations in both the qualitative and quantitative approaches employed. For the
qualitative analysis, one of the limitations of this study is the involvement of a relatively
small number of interviewees. They were selected on the basis that they possessed the
necessary knowledge and relevant experience required to discuss the topic of interest.
However, due to the small sample size, the views expressed by the interviewees cannot
be generalized to all members of the three groups (Issuers, Underwriters and Investors)
in Singapore. For instance, several underwriters declined to comment on their working
relationships with institutional investors as they perceived this issue as confidential and
did not wish to reveal it during a tape-recorded interview. Further, some investors were
not able to provide insights on the CGI, as they claimed they possessed limited
knowledge on the Code or they maintained that it is too detailed to be discussed in a
single interview. Some interviewees also cited time constraints and work commitments
as reasons to engage in ‘shorter than expected’ interviews. Thus, it is likely that the
views expressed by the interviewees provided an incomplete picture of the six key
issues identified in Chapter 6.
Another limitation of the qualitative component of this study is that the questions did
not seek to cover all aspects of corporate governance and IPO performances in
Singapore. Aspects such as directors’ age, qualifications and relevant industry
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experience, IPO firms with multiple listings in different stock exchanges, and
government-controlled IPOs were not addressed during the interviews. A final
limitation relates to the fact that the views expressed by the interviewees in the Issuers
group were based on their recollections of events that took place some years back,
which may not truly reflect current IPO markets. For instance, some of the CEOs
recalled that the Code and the SGX listing rules were less onerous when their
companies first went public. Further, the recent global financial crisis, which occurred
after the interviews were conducted, may have posed more challenges and difficulties
for firms seeking listing in SGX as investors are more reluctant to put their money in
sluggish IPO markets. Attempting to conduct interviews with the management of
companies recently seeking listing would be difficult due to the heavy demands on their
time, and was not within the scope of the study. Fortunately, most of the interviewees in
the Issuers group had been involved in IPOs within the last three to five years of the
interview date, so recollections were relatively fresh in their memories. However, the
study did not cover the views of the interviewees on corporate governance practices
when IPO firms issue further shares to the public after listing, as this was not defined in
the current research. This area may be of interest to researchers to consider in the future.
Despite the limitations mentioned above, the qualitative findings shed light on the link
between corporate governance and IPO performance, and this information was used to
complement the findings of the quantitative phase of the study (as discussed in Chapter
7). The findings may also be used to inform future research involving a larger sample
group of diverse participants to seek their views on corporate governance and IPO
performance in Singapore.
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The quantitative analysis presented in Chapter 7 also comes with several limitations.
Firstly, this study only relates to Singapore IPOs and the results gathered may not
represent trends in the underpricing and long-run performance of IPOs in other
countries. Secondly, the CGI applies an equal-weighting for all the items and may not
accurately reflect the relative importance of individual proxies. However, equal
weighting has the advantage of being transparent and easily replicated in other studies.
In addition, the conclusions are not just solely dependent on the CGI as it is believed
that other independent variables such as VC-backing and lock-up period, may also have
an impact on underpricing and long-run performance. Further, not all of the 55 factors
may apply to IPOs as the CGI scorecard is adapted from the study conducted by Mak
(2007) which is meant for listed companies in general. Third, the study uses the
recommended CG scorecards for Singapore companies by Mak (2007) and focuses on
disclosure of corporate governance practices. It does not consider other CG scorecards
used for other countries as these scorecards were mainly designed for corporate
governance disclosures that apply to specific countries, which may not apply in
Singapore context. Thus, the results may vary if other scorecards are used. Fourthly, the
post-IPO period in this study is limited to three years after listing and does not cover
any period after three years. Despite this limitation, the three-year post-IPO period is
consistent with earlier IPO studies (e.g. Ritter 1991; Levis 1993; Lee, Taylor & Walter
1996a, 1996b; Ljungqvist 1997; Khurshed, Mudambi & Goergen 1999; Reber & Fong
2006). Finally, the study only reflects the corporate governance practices at the point of
listing and it does not take into consideration the possible improvments in corporate
governance structures and practices of these firms post the listing date.
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8.7 Directions for future research
This study focuses on the relationship between corporate governance and IPO
performance. There are certainly other relevant areas that have yet to be explored fully
in Singapore. Firstly, this study covers a sample period from 2000 to 2007, but does not
consider several changes in corporate governance practices and the IPO markets in
Singapore, especially after the collapse of Lehman Brothers in 2008. Further, MAS
issued a revised Code of Corporate Governance on 2 May 2012, where the revised Code
places more emphasis on risk management, directors’ tenure, proportion of independent
directors and other detailed disclosure. The revised Code applies to all listed companies
in respect of Annual Reports relating to financial years commencing from 1 November
2012. In addition, a landmark joint initiative between the ASEAN Capital Markets
Forum (ACMF) and the Asian Development Bank (ADB) developed the ASEAN
Corporate Governance Scorecard (CGS) based on the five areas of the OECD Corporate
Governance Principles. The first edition of the report on corporate governance
performance of the top 50 listed companies in each of the six ASEAN countries
(Indonesia, Philippines, Malaysia, Singapore, Thailand and Vietnam) was issued in
2013. Thus, there is further scope for future research using either the revised Code
issued by MAS or the ASEAN CGS in assessing the corporate governance disclosure
for Singapore as well as other ASEAN countries.
The study does not consider post-IPO changes in board structures and how these
changes could affect issuer performance in the long-run, say between three to five years
after the changes. It is believed that changes in board structures also have an impact on
the CGI, which could be modified based on the revised Code or the ASEAN CGS to
examine the association between post-IPO changes in board structure and long-run
performance.
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A further innovative direction for future research is to extend the current study to Real
Estate Investment Trusts (REITs) and to not-for-profit organisations. It has been
observed that there is a strong growth potential for REITs in Singapore (OCBC
Investment Research 2012). As at 31 December 2013, there are 30 REITs listed on SGX
and it is expected that there will be more listings of REITs in the future. Thus, the
strong growth in REITs provides a fertile ground to examine the quality of corporate
governance disclosure for existing REITs, as well as new REITs going for listing. As
for governance of not-for-profit organisations, it has gained wider publicity and
attention among the general public in recent years – in particular, donors for charitable
organisations – due to the numerous fraud cases occurring in recent years, including the
National Kidney Foundation, Ren Ci Hospital and City Harvest Church. The Charity
Council in Singapore issued a Code of Governance for Charities and Institutions of
Public Characters (IPCs) on 26 November 2007 to promote disclosure of governance
practices among registered charities and IPCs in order to protect public interest.
Therefore, it would be of interest for future researchers to examine the quality of
compliance among registered charities and IPCs in Singapore.
Another possible direction for future research lies with the inclusion of other elements
of board diversity such as ethnic group, directors’ age, academic and professional
qualifications, and tenure. The Korn/Ferry Institute (2013) issued a report that measures
the board composition among the 100 largest listed companies in each of the nine Asia
Pacific countries using a Diversity Scorecard, covering board and gender diversity.
However, this report does not look at IPOs. Thus, the Diversity Scorecard may be used
as an alternative to the CGI and the ASEAN CGS when examining board and gender
diversity for Singapore IPOs.
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Finally, future research on the involvement of family members and their representatives
in various directorships would be of interest. For instance, future scholars may adopt the
approach employed by Chen, Gray and Nowland (2011), where they examine the family
involvement in 536 family firms listed on the Taiwan Stock Exchange. Specifically,
they break down the family variables into family directors, family Chairman and family
CEO, and each of these variables is further analysed into two sub-categories: family
member and family representatives. Another study by Barontini and Caprio (2006)
include family descendants (descendant CEO and descendant non-executive) in addition
to the first generation family involvement. As mentioned in Chapter 7, family firms
accounted for around 61% of the listed firms in Singapore as at 30 September 2011
(CGIO 2013). Thus, it would be of interest to examine the quality of corporate
governance practices among existing family businesses listed on the SGX as well as
new family firms seeking listing in Singapore.
8.8 Conclusion
This chapter summarised the key findings and implications of this study. It also
highlights some limitations and provides possible directions for future research. It is
hoped that this study has laid the foundation and served as a good reference point for
future scholars to continue researching and debating on corporate governance practices
and their impact on the performance of both existing listed firms and IPOs in Singapore.
In view of the ever-changing business environment and uncertainty faced by
management, the results of the study show that corporate governance, at least to a
certain extent, does matter to firms when ensuring compliance to promote stability and
instil confidence among investors and other stakeholders.
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Appendices
Appendix 1: Interview Guides
Interview guide for Chief Executive Officers / Chief Financial Officers 1) What are the main reasons for launching an IPO? 2) How does the firm decide on the offer price? 3) How does the firm select the advisers, such as underwriters, auditors and
lawyers? 4) What are the key changes and the difficulties faced with respect to corporate
governance before and after floatation? Tell me the difficulties faced 5) Based on your experience as a director, how would you define corporate
governance and its purpose? 6) Tell me your thoughts on what distinguishes good and bad corporate governance
practices. 7) To what extent do you think good corporate governance practice influences your
organisation’s overall reputation? 8) To what extent do you think good corporate governance practice influences your
organisation’s short-run performance? 9) To what extent do you think good corporate governance practice influences your
organisation’s long-term performance? 10) Referring to the Corporate Governance Index (CGI) attached, to what extent do
you think the items and the sections are equally weighted? 11) What other factors could be considered in the construction of CGI? 12) Can you think of any factors in the CGI that may not be applicable to IPOs? 13) Are there any other comments you could make on the relationships between
corporate governance and IPO performance?
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Interview guide for Investment Bankers / Underwriters
1) Based on your experience as a banker, how would you define corporate governance and its purpose?
2) Tell me your thoughts on what distinguishes good and bad corporate governance
practices. 3) To what extent do you think good corporate governance practice influences an
IPO firm’s overall reputation? 4) To what extent do you think good corporate governance practice influences in an
IPO firm’s short-run performance? 5) To what extent do you think good corporate governance practice influences in an
IPO firm’s long-term performance? 6) To what extent do you think there is a difference between companies listed in
Main board and SESDAQ with respect to their IPO underpricing and long-term performance?
7) What are your views on the relationship between underwriter reputation and IPO
underpricing and long-term performance? 8) What are your views on IPOs with VC-backing? 9) What are your views of lock-up agreements and lock-up periods for IPOs? 10) How important is the relationship for underwriters and institutional investors
with respect to IPOs? 11) Referring to the Corporate Governance Index (CGI) attached, to what extent do
you think the items and the sections are equally weighted? 12) What other factors could be considered in the construction of CGI? 13) Can you think of any factors in the CGI that may not be applicable to IPOs? 14) Are there any other comments you could make on the relationships between
corporate governance and IPO performance?
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Interview guide for Institutional / Retail Investors
1) How would you define corporate governance and its purpose? 2) Tell me your thoughts on what distinguishes good and bad corporate governance
practices. 3) To what extent do you think good corporate governance practices affect your
decisions to invest in IPO firms? 4) To what extent do you think good corporate governance practice influences an
IPO firm’s overall reputation? 5) To what extent do you think good corporate governance practice influences in an
IPO firm’s short-run performance? 6) To what extent do you think good corporate governance practice influences in an
IPO firm’s long-term performance? 7) How important is board size to an IPO firm at present (pre-IPO and post-IPO)? 8) How do you rate the importance of board size to an IPO firm in the next three
years? 9) How important is board composition to an IPO firm at present (pre-IPO and
post-IPO)? 10) How do you rate the importance of board composition to an IPO firm in the next
three years? 11) How important is CEO duality (e.g. separation of CEO and Chairman) to an IPO
firm at present (pre-IPO and post-IPO)?
12) How do you rate the importance of CEO duality to an IPO firm in the next three years?
13) How important is director ownership to the IPO firm at present (pre-IPO and post-IPO)?
14) How do you rate the importance of director ownership to the IPO firm in the next three years?
15) Referring to the Corporate Governance Index (CGI) attached, to what extent do you think the items and the sections are equally weighted?
16) What other factors could be considered in the construction of CGI?
17) Can you think of any factors in the CGI that may not be applicable to IPOs?
18) Are there any other comments you could make on the relationships between corporate governance and IPO performance?
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Appendix 2: Corporate Governance Index (CGI) Scorecard (Adpated from Mak (2007))
(I) Board’s Conduct of Affairs 1. Is disclosure made of frequency of all board committee meetings?* 2. Did the board meet at least 6 times a year?* 3. Is individual attendance at board meetings of all directors disclosed?* 4. Are all directors attending at least 80% of the board meetings?* 5. Is there a formal orientation program for all new directors? 6. Do the directors receive ongoing training? 7. Are the details of training provided to directors disclosed?
(II) Board Size and Board Composition
8. Do independent directors constitute more than 1/3 of the board? 9. Do independent directors constitute more than 1/2 of the board? 10. Is the complete list of board members disclosed? 11. Is each director classified as independent or not, by name?
(III) Chairman and CEO
12. Is the CEO also the Chairman of the Board? 13. Is the Chairman of the Board an Executive Director (i.e., Executive Chairman)? 14. Is the Chairman of the Board related to another director or to senior management
(e.g. CEO, COO or CFO)?
(IV) Board Membership
15. Is the date of first appointment to the Board or number of years served for each independent director disclosed?
16. Does the company have a nominating committee? 17. Is the chairman of the nominating committee independent? 18. Are the members of the nominating committee disclosed? 19. Are the names of the independent directors of the nominating committee disclosed?
20. Are educational qualifications for each director disclosed? 21. Is working experience for each director disclosed? 22. Are all current directorships held by each director in other listed companies
disclosed? 23. Are all recent directorships (last 3 years) in other listed companies held by each
director disclosed? 24. Does the process for appointing new board members include an independent search
for new board members (e.g., through external consultants, advertising, etc.)?
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(V) Board Performance
25. Is a formal appraisal of board performance conducted? 26. Are criteria for evaluating board performance disclosed? 27. Is formal appraisal of individual directors conducted? 28. Are criteria for evaluating individual directors disclosed?
(VI) Remuneration Matters
29. Does the company have a remuneration committee? 30. Is the chairman of the remuneration committee independent? 31. Are the members of the remuneration committee disclosed? 32. Are the names of the independent directors of the remuneration committee disclosed?
33. Is disclosure made of the process used to determine remuneration? (e.g., external compensation specialists hired) to ascertain industry practices and salary levels for pay and employment conditions?
34. Is the remuneration of executive directors linked to company and/or individual performance?
35. Is there disclosure of the range of performance-related remuneration (e.g., as a percentage of basic salary) that the executive directors are entitled to?
36. Does executive director remuneration include long-term incentives? 37. Is remuneration of non-executive directors linked to their level of contribution and
responsibilities, such as committee responsibilities? 38. Do all directors own shares in the company? 39. Does company use options or shares as remuneration for executive directors or
senior executives? 40. Do non-executive directors / independent directors receive options? 41. Do shares or options vest over a number of years? 42. Is vesting of shares or options subject to performance conditions? 43. Are total fees and remuneration of each individual director disclosed? 44. Are individual components of fees and remuneration of each individual director
fully disclosed? 45. Are the names of directors receiving each band or amount of remuneration disclosed?
(VII) Accountability and Audit
46. Is the list of audit committee members disclosed? 47. Is the chairman of the audit committee independent? 48. Is the entire audit committee members independent? 49. Does the chairman of the audit committee have accounting/finance expertise? 50. Do the members of the audit committee have accounting/financial expertise? 51. Is the frequency of audit committee meetings disclosed?
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(VIII) Internal Audit, Internal Control and Risk Management
52. Is an annual review conducted of company’s internal controls and risk management? 53. Does the annual report include a statement by the board on adequacy of internal
controls?* 54. Does the company have an internal audit function? 55. Does the internal auditor report primarily to the chairman of the audit committee? 56. Does the company have a code of ethics? 57. Does the company have a whistleblowing policy?
(IX) Communication with Shareholders*
58. Does the company’s website include a section for investors?* 59. Does the website include corporate governance information, beyond identity or bios
of board members?* 60. Does the company list a person/contact for responding to shareholder queries either
in the annual report or website?*
*To be removed in the revised CGI.
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Appendix 3: Corporate Governance Index (CGI) Scorecard (Revised)
(I) Board’s Conduct of Affairs
1. Is there a formal orientation program for all new directors? 2. Do the directors receive the appropriate type of training, for example, on changes in
laws, regulations and accounting standards in addition to training to familiarize with the businesses?
3. Are the details of training provided to directors disclosed?
(II) Board Size and Board Composition
4. Do independent directors constitute 1/3 or more of the board? 5. Do independent directors constitute ½ or more of the board? 6. Is the complete list of board members disclosed? 7. Is each director classified as independent or not, by name? 8. Is there any disclosure on family-linked relationship among the directors/senior
management?^
(III) Chairman and CEO
9. Is the CEO also the Chairman of the Board? 10. Is the Chairman of the Board an Executive Director (i.e., Executive Chairman)? 11. Is the Chairman of the Board related to another director or to senior management
(e.g., CEO, COO or CFO)?
(IV) Board Membership
12. Is the date of first appointment to the Board or number of years served for each independent director disclosed?
13. Does the company have a nominating committee? 14. Is the chairman of the nominating committee independent? 15. Are the members of the nominating committee disclosed? 16. Are the names of the independent directors of the nominating committee disclosed?
17. Are educational qualifications for each director disclosed? 18. Is working experience for each director disclosed? 19. Are all current directorships held by each director in other listed companies
disclosed? 20. Are all recent directorships (last 3 years) in other listed companies held by each
director disclosed? 21. Does the process for appointing new board members include an independent search
for new board members (e.g., through external consultants, advertising, etc.)?
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(V) Board Performance
22. Is a formal appraisal of board performance conducted? 23. Are criteria for evaluating board performance disclosed? 24. Is formal appraisal of individual director conducted? 25. Are criteria for evaluating individual director disclosed?
(VI) Remuneration and Executive Resource Matters
26. Does the company have a remuneration committee? 27. Is the chairman of the remuneration committee independent? 28. Are the members of the remuneration committee disclosed? 29. Are the names of the independent directors of the remuneration committee disclosed?
30. Is disclosure made of the process used to determine remuneration? (e.g., external compensation specialists hired) to ascertain industry practices and salary levels for pay and employment conditions?
31. Is the remuneration of executive directors linked to company or/and individual performance?
32. Is there disclosure of the range of performance-related remuneration (e.g., as a percentage of basic salary) that the executive directors are entitled to?
33. Does executive director remuneration include long-term incentives? 34. Is remuneration of non-executive directors linked to their level of contribution and
responsibilities, such as committee responsibilities? 35. Do all directors own shares in the company? 36. Does company use options or shares as remuneration for executive directors or
senior executives? 37. Do non-executive directors / independent directors receive options? 38. Do shares or options vest over a number of years? 39. Is vesting of shares or options subject to performance conditions? 40. Are total fees and remuneration of each individual director disclosed? 41. Are individual component of fees and remuneration of each individual director fully
disclosed? 42. Are the names of directors receiving each band or amount of remuneration disclosed? 43. Is there any disclosure pertaining to succession planning of directors?^
(VII) Accountability and Audit
44. Is the list of audit committee members disclosed? 45. Is the chairman of the audit committee independent? 46. Is the entire audit committee members independent? 47. Does the chairman of the audit committee have accounting/finance expertise? 48. Do the members of the audit committee have accounting/financial expertise? 49. Is the frequency of audit committee meetings disclosed?
327
(VIII) Internal Audit, Internal Control and Risk Management
50. Does the company disclose the company’s internal controls and risk management? 51. Does the company have an internal audit function? 52. Does the internal auditor report primarily to the chairman of the audit committee? 53. Does the company have a code of ethics? 54. Does the company have a whistleblowing policy? 55. Is there any disclosure on related party transactions?^
^New items in the revised CGI.
328
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