Under-pricing and long-run performance of Initial Public Offerings in developing markets : the case of Thailand
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The IPO underpricing phenomenon has existed for a long time in stock markets around the world, although its magnitude varies from country to country. However, the evidence regarding IPO over-performance or underperformance in the long-run is mixed. The purpose of this thesis is to examine the long-run performance of IPOs in Thailand using various methods to ascertain the significance of the over- or under-performance of IPOs. The Thai stock market is a relatively new stock exchange compared to established stock markets. Therefore, there are not yet many public companies listed on the Thai market. Consequently, one of the ambitions of the Stock Exchange of Thailand (SET) is to stimulate market activity and increase the number of Initial Public Offerings (IPOs) in Thailand. This may mean that a close study of a number of important issues related to the Thai IPO stock market is particularly interesting. The thesis, therefore, investigates three inter-related empirical issues concerning the Thai IPOs listed on the Stock Exchange of Thailand (SET) and the Market for Alternative Investment (MAI) during the period 2001 to 2012. The first empirical study re-examined the evidence from the long-run returns. The threeyear stock returns of the IPOs were investigated using Cumulative Abnormal Returns (CAR), Buy-and-Hold Abnormal Returns (BHAR), and Wealth Relatives (WR). This study further compared abnormal returns with various alternative benchmarks, such as the CAPM, the Fama and French (1993) Three-Factor (FF) models, the Size Control Portfolio (SD) model, the eight industry benchmarks, and also more robust statistical tests. The calendar-time approach based on the market model with an additional liquidity factor as well as Fama-French and Carhart models were applied for verifying long-run abnormal returns. This study provided robust evidence that Thai IPOs underperform in the long-run, irrespective of alternative benchmarks and methods. However, the results are sensitive not only to the methodology used, but also to the exact-time-period chosen and the size effect from big-sized companies going public in the sample period. If they omitted the two big firms from the IPO sample and considered the equally-weighted CAR and BHAR, the event-time returns related to CAPM, FF and SD models and the calendar-time approach, they would conclude that they cannot earn any abnormal returns irrespective of the alternative benchmarks and weighting methods used. In the same vein, after controlling for firm size, the long-term over-performance will disappear for Thai IPOs. The second empirical study examines the relationship between the intended uses of IPO proceeds disclosure and the under-pricing and long-run performance of IPOs. The results reveal that the levels of use-of-proceeds disclosures reduce firms’ cost of capital. This study also suggests that firms disclosed use-of-proceeds for investment has negative effects on IPO underpricing. The findings also indicate that the proportion of common shares owned by the Thai government provides a positive signal for IPO overperformance in the long-run. For the effect of the use-of-proceeds purposes, this study suggests that ‘Investment’ IPOs perform better in the long-run than ‘Debt Repayment’ IPOs. The final empirical study investigated the relationship between IPOs’ pricing effects and their subsequent classification as speculative investments. The findings showed a significant positive relationship between the magnitude of the IPO underpricing and the probability of an IPO firm being officially classified as speculative on the Turnover List (TOL). The results also revealed that a six-month abnormal return after going public increases the probability of speculative dealing in the IPOs. There are several implications for this study. The findings may therefore be useful for investors, security analysts, and companies and regulators in many other emerging markets beyond Thailand. Given the conflicting results of poor post-IPO stock market performance, investors may do better holding Thai IPOs for a short period with the likelihood of gaining a higher return. In addition, the results help investors to identify which characteristics are associated with more over-performance or underperformance, which will be informative to them when formulating their investment strategies. For the IPO firms, endogenous information disclosure of intended use-of-proceeds could be used as another signaling factor, but it creates a trade-off between the benefit of reducing information asymmetry and the costs associated with revealing information and possible litigation. Additionally, the findings from the third empirical work in this thesis are particularly useful for SET and SEC, enabling the Thai authorities to monitor IPOs that have a high probability of becoming speculative stocks in the future and so be able to warn investors about the risks associated with trading in them. Regulators may also use the probability of Turnover List risk as one of the benchmarks to measure the success of the rules they impose on companies planning to go public.