Journal of Business Finance & Accounting, 25(3) & (4), April/May 1998, 0306-686X

UNDERPRICING AND FIRM QUALITY IN INITIAL

PUBLIC OFFERINGS: EVIDENCE FROM SINGAPORE
Allaudeen Hameed and Guan Hua Lim

INTRODUCTION

Recent changes to the method of issuing shares in an initial public offering in

Singapore raise interesting challenges to the existing theories on IPOs.
Traditionally, a single issue price for the IPO is determined jointly by the
issuer and the underwriter. Since February 1993, companies listing their
shares on the Stock Exchange of Singapore can use an alternate tender
mechanism to determine their issue prices. In particular, the public offering
can be offered in two tranches: the first tranche of the IPO is offered at a fixed
price while the issue price of the second tranche is determined via a tender
system.1 For the tender portion, all successful bidders pay the same price using
the French or single price (called the strike price) auction system.2 Of the 53
initial public offerings in Singapore between February 1993 and July 1995, 20
companies used the tender method to determine their issue prices while the
remaining 33 continued to use the traditional fixed price mechanism and
neither method appears to have completely dominated the IPO market in
Singapore during the sample period.
Several recent papers explain that issuing firms use various mechanisms to
signal the quality of the IPO to the market. For example, Leland and Pyle
(1977), Hughes (1986) and Lam (1991) all suggest that firms use the
proportion of owners' equity retained as a signalling device. Other signalling
devices suggested are the choice of underwriter (Titman and Trueman, 1986),
and the proposed uses of the IPO proceeds (Beatty and Ritter, 1986; and
Krinsky and Rotenberg, 1989). In the models proposed by Allen and
Faulhaber (1989), Grinblatt and Hwang (1989) and Welch (1989), firms use
underpricing to signal quality. In these models, the `good' firms underprice
the new issues and subsequently use seasoned offerings to sell at market prices,
since the firms' quality are revealed after the IPO exercises.
In this paper, we argue that firms in Singapore use the IPO method (i.e.
purely fixed versus combined fixed and tender methods) to signal their quality
to the market. Under the fixed IPO method, the issuing firm decides on a single

* The authors are from the Department of Finance and Accounting, National University of
Singapore. They would like to thank Jerry Bowman and an anonymous referee for their helpful
comments. Funding for the project is provided by an academic research grant from the National
University of Singapore. (Paper received March 1997, revised and accepted July 1997).
Address for correspondence: Allaudeen Hameed, Department of Finance and Accounting,
National University of Singapore, 10 Kent Ridge Crescent, Singapore 119260.
e-mail: fbaah@nus.sg

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and 350 Main Street, Malden, MA 02148, USA. 455
456 HAMEED AND LIM

issue price, and it lets the investors decide on whether and how much to
subscribe. Usually, these IPOs are underpriced and attract high subscription
rates.3 However, by choosing to tender part of its initial offering, the issuing
firm essentially encourages potential investors to submit bids based on their
valuations of the `true' value of the firm. Since the issuer wants submissions of
high bids (which translate into less underpricing for the issuing firm), it must be
willing to reveal more (good news) about the firm. Thus, by tendering part of its
IPO, the `good' company has an opportunity to reveal information about the
firm and hence, obtains higher proceeds from the issue. The cost of revealing
itself (in the form of a lower strike price and possibly under-subscription) would
prevent the `bad' firms from tendering their public offerings.
The evidence reported in this paper supports the above signalling
hypothesis. We find that IPO firms that tender part of their shares have a
longer and better track record than those that do not tender. The tendering
firms are also larger. Furthermore, we find a greater extent of underpricing
in the fixed tranche of the tender IPOs relative to that of the purely fixed IPOs.
This greater degree of underpricing is consistent with the idea that better
quality firms underprice their shares to signal quality (see for example, Allen
and Faulhaber, 1989). Unlike the signalling models of Allen and Faulhaber
(1989) and others, information here is revealed during the offer period instead
of the post-IPO period. For IPO firms opting to use the tender method, the
underpricing in the fixed tranche is `recouped' by the higher strike price for
the tender tranche. Interestingly, there is no statistical difference in the overall
underpricing (sum of fixed and tender tranches) between the tendering and
non-tendering IPOs.
The rest of the paper is organised as follows. The next section discusses the
IPO market in Singapore and the third section describes the data. The fourth
section presents the empirical results, and the final section concludes.

THE IPO MARKET IN SINGAPORE

Traditionally, companies going public and seeking a listing on the Stock

Exchange of Singapore (SES) offer their shares to the investing public at pre-
determined fixed prices. These prices are fixed by the issuers in conjunction
with the issue managers and the underwriters. If the issue is oversubscribed,
rationing is done and the basis of rationing is publicly disclosed (see Koh and
Walter, 1989 for details). Allocation preferences are given to small investors so
that there will be a certain minimum number of shareholders.
Starting from July 29, 1991, companies seeking public listing of their shares
have a choice of IPO methods. They can continue to offer all their shares on a
fixed price basis, or they can invite the investing public to tender for part of the
share issue. The shares in the tender tranche are auctioned using the Dutch or
discriminatory price auction method. Under this method, investors submit

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price-quantity bids. Shares are then allotted in full to the bidders, starting
with the bidders who submit the highest tender price and progressing
downwards until all the available shares are allotted. Successful bidders pay
for the allotted shares at their tendered prices.
This option was implemented for only two IPOs: Singapore Computer
Systems in September 1991, and Keppel Integrated Engineering in July 1992.
The range of successful bids under the Dutch auction was wide. Many investors
paid more than the market price of the shares on the first trading day. Further-
more, this method was claimed to favour the informed investors and thus, the
uninformed had little incentive to participate in the bidding. Hence, companies
reverted back to the traditional IPO mechanism after these two issues.
Consequently, the Stock Exchange of Singapore introduced an alternative
to the Dutch-type tender method of offering shares in February 1993. IPO
firms can now choose to conduct the tender by way of the French or a single-
strike price auction method. Under the French auction, all successful bidders
pay the same price for their allotted shares regardless of their bid prices. The
last price that clears the entire tranche is called the strike price and all
successful bidders pay the same strike price. Issuing firms choosing the tender
method for their shares must offer their shares in two tranches: a fixed price
tranche and a tender price tranche.

Tender IPOs: Fixed Price Tranche

The SES Listing Manual stipulates that a minimum number of shares must be
offered to the public under the fixed price method to ensure that the company
meets the minimum number of shareholders requirement. For instance, if the
IPO size is less than S$12.5 million, then 40 percent or S$3 million (whichever
is higher) must be offered under the fixed tranche. If the IPO is between
S$12.5 million and S$25 million, then the fixed tranche must make up at least
35 percent of the issue or S$5 million (whichever is higher). For issues above
S$25 million, the fixed tranche must be at least 30 percent or S$8.75 million
(whichever is higher).4
Share applications under the fixed tranche are for a limited number of
shares, such as 1,000 or 5,000 shares, and investors are not allowed to make
multiple applications. The issue price for the fixed tranche is set by the issuer.
In the event of oversubscription, rationing is done by randomly selecting from
the applications. If the issue is undersubscribed, the remaining shares will be
made available to subscribers under the tender tranche.

Tender IPOs: Tender Price Tranche

Investors applying for shares in an IPO can choose to apply under the fixed
price tranche (where, as mentioned above, only a limited number of shares
are available per investor), the tender tranche or both.5 Investors who want

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to apply under the tender tranche submit price-quantity bids. The stock
exchange rule specifies that the issuing firm must set the minimum tender price
at or above the issue price for its fixed tranche (Clause 2(2)(d), Practice Note
No. 3b, SES Listing Manual).
On the closing date of the offer, valid applications are sorted by bid prices.
Allocations are then made starting from the highest bidders, until the tender
tranche is fully subscribed. If the tender tranche is undersubscribed, all tender
applications will be fully allocated and the applicants pay the minimum
tender price. The remaining shares will be made available to subscribers
under the fixed price tranche. If both the fixed price and tender tranches are
undersubscribed, the excess shares will be taken up by the underwriter at the
issue price (fixed price tranche), if the issue is underwritten. This single-strike
price method was first used by IPC Corporation in April 1993. All tender
IPOs since then have been under the single-strike price tender method even
though companies can still choose the Dutch auction method.

DATA

This study covers all IPOs over the period from April 1993 to July 1995.
During this period, companies going public and seeking public listings had
the option of choosing the purely fixed price method (Fixed IPOs) or a
combination of fixed and the single-strike price tender method (Fixed and
Tender IPOs). There are a total of fifty-three IPOs in the data set. All relevant
information pertaining to the IPOs is collected from their respective
prospectuses. A prospectus in Singapore is typically issued three to four weeks
before the application closing date. Subscription rates and trading prices are
obtained from the relevant issues of the local newspapers Business Times, Straits
Times, and from the monthly SES Journal. The Stock Exchange of Singapore
All-Share Index (SESALL), which is a value-weighted index of all shares
traded on the exchange, is used as our measure of the market index.
IPO firms seeking listing on the Stock Exchange of Singapore can be listed
on either the Main Board of the SES or on the Stock Exchange of Singapore
Dealing and Automated Quotation Market (SESDAQ). The admission
requirements are, however, more stringent for companies aspiring to be listed
on the Main Board than on SESDAQ. In particular, Main Board aspirants
must have a paid-up capital of not less than $15 million and a minimum five-
year track record, of which at least the last three must be profitable. In
contrast, SESDAQ does not require a minimum paid-up capital and only a
recommended three-year track record (Appendix 1a and 1d of the SES Listing
Manual). There is also no requirement on profitability for SESDAQ
applicants. SESDAQ is also characterised by poorer liquidity and smaller
free-floats. Firms listed on SESDAQ for at least two years and have shown
continued good operating performances can and have been promoted to the
Main Board.6 Furthermore, unlike the Nasdaq in the USA, none of the

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companies in Singapore who qualify for the Main Board have opted for or
choose to remain on SESDAQ. Moreover, the general market perception is
that SESDAQ companies are relatively unproven, more risky, and of a lower
quality on average compared to Main Board listed companies.7

RESULTS

Since the entry requirements differ greatly between the two types of listings
(Main Board and SESDAQ), the Main Board IPO firms are likely to be
higher quality firms. This allows us to use the listing status of the IPO firm as
an indicator of the firm's quality. Panel A of Table 1 presents the distribution
of the IPO firms across the two types of listings. It shows that of the 20 IPOs
that chose to use the tender IPO method, 18 or 90 percent were Main Board
listings. We also observe that a significantly smaller proportion of firms listed
on SESDAQ (i.e. only 9 percent) used the tender price IPO method. Finally,
of the firms listed on the Main Board, more firms (60 percent versus 40
percent) use the tender tranche although the proportion is not significantly
higher. The fact that a higher proportion of firms using the tender method is
Main Board companies indicates that this method is chosen by the `good'
firms, with established track record. Since there is no a priori reason to believe
that firms choosing the fixed price tranche are all `bad' firms, as expected, we
observe that there is no significant difference between the two listing types for
the fixed price IPO method.
The average market capitalization of the sample IPO firms is shown in
Table 1 (Panel B). The average market value of the tender IPOs of S$413.15
million is significantly higher than the average market value of $115.38
million for those firms that chose not to use the tender method. The difference
in the average market capitalization between the two groups is significant,
even after controlling for the listing type. Although the firms listed on the
Main Board have to meet a higher paid-up capital requirement, it is indeed
striking to note that the average market value of the SESDAQ listings using
the tender method is higher than the non-tendering Main Board companies.
Hence, the issuing firm's decision to use the tender tranche appears to be
related to the quality of the IPO.

Purely Fixed Versus Tender IPO Methods

Firms that use the tender tranche to issue their IPO have to set the percentage
of the issue that will be offered via tender. If IPO firms signal quality by
choosing the tender method, then the proportion of IPO that is tendered
would be indicative of the confidence the owners of the firm have in their firm's
quality. The `good' firms can signal quality by `underpricing' the tender
portion through the setting of a low minimum tender price so that it will be

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Table 1
IPO Method and Listing Status

Panel A: Distribution of IPOs by IPO Method and Listing Status

Listing IPO Method 2a
Status Tender & Fixed Fixed

Main Board 18 (60%) 12 (40%) 1.20

SESDAQ 2 (9%) 21 (91%) 15.70**
2b 12.80** 2.45

Panel B: Average Market Capitalization (S$ Million) by IPO Method and

Listing Status
Listing Status
IPO Method Main Board SESDAQ Total

Tender 419.65# 361.35 413.51

Fixed & Tender 205.17 64.07 115.38
t-statisticsc 1.6696** 5.9280** 3.9765**
Notes:
** Significant at the 5% level.
#
Excludes Singapore Telecoms which had a market capitalization of S$63.1 billion.
a
The 2 test is a test of the null hypothesis that the proportion of IPOs under the two IPO
methods are equal, controlling for the listing status.
b
The 2 test is a test of the null hypothesis that the proportion of IPOs under the two listing
status are equal, controlling for the IPO type.
c
The t-test is a test of the null hypothesis that the market capitalization is the same for the two
IPO methods.

very costly for `bad' firms to imitate. Recall, that the proceeds from the issue
depend on the strike price for the tender tranche. There appears to be some
variation in the proportion tendered; ranging from 30 to 70 percent. Table 2
shows that the average proportion of the issue that is tendered is 51 percent
with a standard deviation of 10.2 percent.
Leland and Pyle (1977) argue that issuers can signal quality of an IPO by
retaining a high proportion of the ownership of the firm. IPOs in Singapore
have a high average retained ownership of 72 percent. However, as shown in
Table 2, the average proportion retained by the owners do not differ between
the two IPO methods: the mean value is 72 percent and 70 percent for the
purely fixed and the fixed and tender methods respectively. The decision to
tender the issue to raise capital does not appear to be related to the amount of
retained ownership.
In order to measure the amount of uncertainty with respect to the price of
the IPO, we use the variation in the trading price on the first trading day.
Specifically, the uncertainty (called High-Low) is measured by the difference
between the high and low prices during the first day of trading, divided by the

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Table 2
Summary Statistics and Differences in Means Between IPO Methods

IPO Method
Fixed Price Fixed and
Tranche Only Tender Tranches
Mean Standard Mean Standard
Variablea (%) Deviation (%) Deviation t-statisticb

Proportion Tendered ÿ ÿ 51.00 10.20 ÿ

Underpricing (unadjusted)
ÿ Fixed Tranche 29.84 39.44 49.47 41.98 1.69*
Underpricing (market adjusted)
ÿ Fixed Tranche 29.89 37.86 47.07 41.06 1.52
Underpricing (unadjusted)
ÿ Total 29.84 39.44 19.52 15.16 1.34
Underpricing (market adjusted)
ÿ Total 29.89 37.86 17.11 14.38 1.74*
Proportion Retained 72.49 14.24 70.40 8.36 0.67
High-Low 2.10 8.79 10.37 7.11 0.78
Notes:
* Significant at the 10% level.
a
Proportion Tendered is the proportion of shares that are offered under the tender tranche.
Underpricing ö Fixed Tranche is measured as the difference between the closing price on the
first trading day and the subscription price, divided by the subscription price for the Fixed
tranche only. Underpricing ö Total is the weighted average of the underpricing in the two
tranches, where the underpricing in the tender tranche is taken as the difference between the
closing price and the strike price, divided by the strike price. Proportion Retained refers to the
proportion of issued capital of the firm retained by the owners after the IPO. High-Low is the
difference between the high and low price recorded on the first trading day after the IPO,
divided by the average of the high and low prices.
b
The t-statistics are for the test that the mean values under the two IPO methods are equal.

average of the high and low prices. We do not find evidence that the (High-
Low) uncertainty between the methods is different.
Two measures of IPO underpricing are used. The first measures the amount
of underpricing in the fixed tranche: the difference between the closing price
on the first day of trading and the (fixed) subscription price, divided by the
subscription price. The second measure, called total underpricing, applies to
the tender and fixed IPOs: a weighted average of the underpricing in the fixed
and tender tranches is used, where the underpricing in the tender tranche is
measured as the difference between the first trading day closing price and the
strike price, divided by the strike price. The weightage for the tender tranche is
given by the proportion tendered. For the purely fixed IPOs, the two measures
of underpricing are identical. These measures of underpricing are referred to
as unadjusted underpricing.

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It is also possible that the degree of underpricing may be affected by changes

in market conditions. To address this possibility, we adjust the underpricing
measure by the return on the market index over the relevant period. The
market adjusted underpricing is measured as the difference between the
unadjusted underpricing and the market return, where the market return
represents the return on the SESALL index between the price fixation date
and the first day of trading.
Similar to the pure fixed price IPO method, firms opting to tender part of
their shares have to determine the issue price for the fixed tranche of the IPO.
We argue that the tendering firms are signalling better quality and hence, we
expect these IPOs to underprice the fixed tranche more than non-tendering
IPO firms who will find heavy underpricing to be too costly to mimic (Leland
and Pyle, 1977 and Grinblatt and Titman, 1989). Furthermore, by
underpricing the fixed tranche, the tendering companies can encourage
investors to investigate and apply for the shares at high tender bids. Table 2
reports the mean and standard deviation of underpricing in the fixed tranche
under the two methods. The average underpricing in the fixed tranche for the
tender IPOs is a staggering 50 percent, while the purely fixed IPOs are
underpriced by an average 30 percent. This difference is economically
significant and statistically significant at the 10 percent level. The mean
values are not qualitatively affected when the market adjusted underpricing
measures. This evidence comports with our postulation that firms use the
IPO tender tranche option to signal firm quality.
As shown in Table 2, the difference in the amount of total underpricing
under the two IPO methods is less striking; the weighted average underpricing
for the tender IPOs reduces to 20 percent, the difference between the two
methods is not statistically significant. However, the market adjusted
underpricing indicates a marginally significant difference in the underpricing
between the two methods.
We find similar results even after controlling for the type of listing. Table 3
reports the differences in the level of underpricing between the two methods
when the sample is split into two groups: those that are listed on the Mainboard
and SESDAQ. The results show a significantly higher underpricing in the fixed
tranche for SESDAQ listings. The other comparisons do not yield strong
statistical differences in underpricing for the Mainboard lisitngs. Identical
qualitative results are obtained when we examine the market adjusted under-
pricing measures (results are not reported here but are available upon request
from the authors).
These findings can be reconciled with the signalling explanation for IPO
underpricing in an efficient market. The signalling models in Allen and
Faulhaber (1987), Nanda (1989) and Welch (1989) postulate that firms use
underpricing as a signal of quality. In these models, high quality firms have
to underprice to communicate their superior quality to the market. The IPO
proceeds for these high quality firms would be lesser, although these firms

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Table 3
Listing Status and IPO Underpricing

IPO Method
Fixed Price Fixed and
Tranche Only Tender Tranches
Mean Standard Mean Standard
Variablea (%) Deviation (%) Deviation t-statisticb

Mainboard: 20.84 42.26 47.77 43.98 1.68

Underpricing ÿ Fixed Tranche
SESDAQ: 34.98 37.82 64.76 9.66 2.78**
Underpricing ÿ Fixed Tranche
Mainboard: 20.85 42.26 17.72 14.18 0.24
Underpricing ÿ Total
SESDAQ: 34.98 37.82 35.65 19.18 0.04
Underpricing ÿ Total
Notes:
* Significant at the 10% level.
** Significant at the 5% level.
a
Underpricing ö Fixed Tranche is measured as the difference between the closing price on the
first trading day and the subscription price, divided by the subscription price for the Fixed tranche
only. Underpricing ö Total is the weighted average of the underpricing in the two tranches,
where the underpricing in the tender tranche is taken as the difference between the closing price
and the strike price, divided by the strike price.
b
The t-statistics are for the test that the mean values under the two IPO methods are equal.

could `recoup' through subsequent secondary offerings. However, with the

tender IPO process, the `good' firms need only underprice the fixed tranche,
and would `recoup' through a higher strike price for its tender tranche. Hence,
the tender IPO method provides a quality signalling mechanism whereby the
information about the firm is revealed during the IPO process.
However, the cross-sectional variation in total underpricing for the fixed
IPOs (40 percent) is significantly higher than that for the tendering firms (15
percent).8 Although the evidence suggests that the mean total underpricing is
not significantly different across the two methods, there is more uncertainty
about the amount of underpricing in the case of purely fixed IPOs. This
suggests that firms that choose the tender option, on average underprice their
shares to the same extent as the non-tendering firms, but there is lower
uncertainty associated with the tender issues.

Multivariate Analysis of Underpricing

Underpricing the Fixed Tranche
Table 4 presents regressions of the extent of underpricing in the fixed tranche

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Table 4
Multivariate Regression Analysis of the Extent of Underpricing in the Fixed
Tranche

Model 1 Model 2 Model 3

Dependent Unadjusted Market Adjusted Unadjusted
Variablea Underpricing Underpricing Underpricing

Independent Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic

Variablesb

Intercept 0.720 2.697** 0.714 2.703** 0.708 2.597**

Proportion Retained 0.568 1.651 0.523 1.535 0.579 1.645
Firm Size ÿ0.0001 ÿ0.633 ÿ0.0001 ÿ0.595 ÿ0.0001 ÿ0.557
High-Low 0.306 6.635** 0.291 6.373** 0.306 6.442**
Listing Type ÿ0.210 ÿ2.211** ÿ0.206 ÿ2.191** ÿ0.195 ÿ2.024**
Proportion Tendered 0.642 3.241** 0.587 3.00** ÿ ÿ
Tender Dummy ÿ ÿ ÿ ÿ 0.308 2.861**
Adjusted R2 0.58 0.51 0.52
F-statistic 12.70** 11.61** 11.80**

Notes:
* Significant at the 10% level.
** Significant at the 5% level.
a
Unadjusted Underpricing in the fixed tranche is measured as the difference between the closing
price on the first trading day and the subscription price, divided by the subscription price for the
Fixed tranche only. Market Adjusted Underpricing in the fixed tranche is the Unadjusted
Underpricing less return on the market index from issue to listing dates.
b
Proportion retained refers to the proportion of issued capital of the firm retained by the owners
after the IPO. Firm size is measured by the market capitalization on the first trading day of the
IPO. High-Low is the log of the difference between the high and low price recorded on the first
trading day. Listing type is a dummy variable for the exchange in which the IPO is listed: 1 if
listed on the Main Board and 0 if listed on SESDAQ. Proportion tendered is the proportion of
shares that are offered under the tender tranche.

on the various control measures: the proportion of retained ownership, market

capitalization, the listing status and the variation of prices on the first trading
day (the log of the difference between the day's high and low prices), denoted
as High-Low. To examine if there is a significant difference between the
degree of underpricing and the IPO method, we use two measures: the
proportion of the IPO which is tendered (Model 1) and a tender dummy,
which equals one (zero) if the firm chooses the tender (purely fixed) method
(Model 3). Model 2 in Table 3 is identical to Model 1 except that we use the
market adjusted underpricing measure as the dependent variable.
The regression results using Model 1 show that the degree of underpricing in
the fixed tranche is positively related to the uncertainty/variation in first day
trading prices. Firms whose prices are more uncertain tend to underprice their

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IPO more. As expected, firms listed on the Main Board are underpriced
significantly less than those firms listed on SESDAQ. However, the proportion
of ownership retained and firm size do not appear to significantly affect
underpricing.9 More importantly, the results show that there is a positive
relation between the proportion of IPO tendered and the level of underpricing
in the fixed tranche. Firms choosing to tender part of their IPO underprice the
fixed tranche significantly more than those who do not tender. Model 2 shows
that adjustment for changes in market conditions does not affect our results.
Controlling for the above factors, the evidence in Model 3 shows that the
tender dummy is significantly positive; the tendering firms underprice the
fixed tranche by about 30 percent more than the other firms. This huge
difference in underpricing is statistically and economically significant.
Consistent with the predictions in Leland and Pyle (1977) and Grinblatt and
Hwang (1989), our findings support the hypothesis that firms using the tender
method heavily underprice the fixed tranche and that these firms choose the
tender option to signal better quality.

Underpricing the Combined Fixed and Tender Tranches

Finally, we examine the overall extent of underpricing by the difference
between the closing price at the end of the first trading day and the issue price
of the IPO. For the tendering IPOs, the issue price is the weighted average of
the strike and fixed prices for the tender and fixed tranches respectively, where
the weightage on the tender tranche is given by the proportion tendered. The
measure of underpricing for the purely fixed IPOs is identical to that used
earlier.
In Table 5, we report the regression results for the extent of total
underpricing. The regression results for total unadjusted underpricing
(Model 1) and market adjusted underpricing (Model 2) are presented. The
results for Model 1 shows that the proportion of ownership retained is
positively related to total underpricing, supporting the signalling hypothesis
in Leland and Pyle (1977). Bigger firms are less underpriced and this is
consistent with the ex-ante uncertainty argument in Beatty and Ritter
(1986), where larger firms have lower ex-ante uncertainty and a lower
amount of expected underpricing. The increase in the statistical significance
of these two variables compared to the results for the fixed tranche is not
surprising since these variables are based on the overall firm. Again, the
Main Board listings are associated with a smaller amount of underpricing
while firms that experience larger variation in the transacted prices on the
first day of listing are underpriced more. However, we find that on average,
the magnitude of underpricing is not related to the proportion tendered or
the choice of using the tender method. After controlling for the various
factors that affect IPO pricing, the overall average first day premium for
tendering IPO firms in our sample is not statistically different from those

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Table 5
Multivariate Regression Analysis of the Extent of Underpricing in the Com-
bined Fixed and Tender Tranches

Dependent Model 1 Model 2

Variablea Unadjusted Underpricing Market Adjusted Underpricing

Independent Coefficient t-statistic Coefficient t-statistic

Variableb
Intercept 0.664 3.024** 0.657 3.054**
Proportion Retained 0.542 1.916* 0.496 1.789*
Firm Size ÿ0.0003 ÿ2.264** ÿ0.0003 ÿ2.254**
High-Low 0.271 7.148** 0.256 6.876**
Listing Type ÿ0.162 ÿ2.079** ÿ0.158 ÿ2.067**
Proportion Tendered 0.141 0.869 0.086 0.541
Adjusted R2 0.524 0.512
F-statistic 12.243** 11.697

Notes:
* Significant at the 10% level.
** Significant at the 5% level.
a
Unadjusted Underpricing in the combined fixed and tender tranches is measured as the
difference between the closing price on the first trading day and the weighted average of the
subscription prices in the two tranches, divided by the weighted average subscription prices.
Market Adjusted Underpricing in the combined fixed and tender tranches is the Unadjusted
Underpricing less return on the market index from issue to listing dates.
b
Proportion retained refers to the proportion of issued capital of the firm retained by the owners
after the IPO. Firm size is measured by the market capitalization on the first trading day of the
IPO. High-Low is the log of the difference between the high and low price recorded on the first
trading day. Listing type is a dummy variable for the exchange in which the IPO is listed: 1 if
listed on the Main Board and 0 if listed on SESDAQ. Proportion tendered is the proportion of
shares that are offered under the tender tranche.

IPO firms that did not use the tender method. Furthermore, the results are
unaffected when the underpricing amount is adjusted for the change in
market index value over the issue period (see Model 2).
As we showed earlier, there appears to be a wider dispersion in the
amount of underpricing among the IPO firms that use the purely fixed
method (see Table 2). This finding begs the question: why do good quality
firms choose the tender method when the overall average underpricing is the
same under the two methods? We conjecture that one plausible explanation
for this result is that higher quality firms may choose the tender option
because it reduces the risk of undersubscription. Indirect evidence of this
comes from the fact that about 15 percent of the purely fixed IPOs are
undersubscribed while undersubscription occurred in only five percent of
the tendering IPO firms.

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 UNDERPRICING IN INITIAL PUBLIC OFFERINGS 467

CONCLUSIONS

This study examined the role of the IPO method in signalling firm quality.
Companies going public in Singapore have a choice of two methods of
determining their issue price: (1) fixed price method and (2) fixed price and
tender method. Our evidence shows that the IPO firm's decision to use the
tender process is a mechanism to signal firm quality. In general, we find that
the firms that use the tender method are of higher quality, consistent with the
signalling hypothesis.
The tendering firms also underprice their fixed portions more than those
IPO firms that choose the fixed method. However, the overall average
underpricing (fixed and tender portion combined) between the two sets of
firms is not statistically different. This comports with the notion that the
tendering firm underprices its fixed tranche and that this `loss in revenue' is
recovered by the higher price it manages to obtain for the tender portion of
its IPO offering. We further argue that this can be explained by the fact that
the quality of the firm is revealed in the tender process, before trading on the
firm's shares begin. Overall, our results are consistent with the existing
signalling literature that suggests that good firms underprice their IPOs to
signal quality.

NOTES
1 SES regulations state that at least 30 percent of the IPO must be offered under the first (fixed
price) tranche.
2 Although a Dutch or discriminatory price auction method was first introduced in July 1991,
this method was adopted by only two IPOs. Hence, our analyses do not include the Dutch
auction method.
3 See Dawson (1984), Wong and Chiang (1986), Koh and Walter (1989), Saunders and Lim
(1990), and Lam (1991). The average first day premium in 1994 is 29.3 percent while the
average subscription rate for the same year is 18.9 times.
4 See Clause 2(1)(a), Practice Note No. 3b, SES Listing Manual.
5 The aggregate number of shares an investor may apply for shall not exceed five percent of the
issue (Clause 2(2)(c), Practice Note No. 3b, SES Listing Manual).
6 This is stated in Clause 606, Chapter 6 of the SES Listing Manual. Fourteen companies have so
far been promoted under this clause. They include Singapore National Printers, TIBS, and
Compact Metals.
7 This is reinforced by the fact that the SES `demoted' two companies from the Main Board to
SESDAQ in 1992 and 1993 respectively.
8 The standard F-test for the null hypothesis that the variances in total underpricing between the
two IPO methods are equal is rejected at the one percent level.
9 Removing these two variables from the regression equation does not alter the results.

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