How the unremunerated reserve requirement by the Bank of Thailand affects IPO underpricing and the long-run performance of IPOs
| Pages | 317-342 |
| Date | 11 July 2016 |
| Published date | 11 July 2016 |
| DOI | https://doi.org/10.1108/JFRC-09-2015-0052 |
| Author | Kulabutr Komenkul,Dhanawat Siriwattanakul |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
How the unremunerated reserve
requirement by the Bank
of Thailand affects IPO
underpricing and the long-run
performance of IPOs
Kulabutr Komenkul
Department of Finance and Investment, Rangsit University,
Pathum Thani, Thailand, and
Dhanawat Siriwattanakul
Department of Finance, Kasetsart University, Bangkok, Thailand
Abstract
Purpose – The purpose of this paper is to investigate the characteristics of the Initial Public Offering
(IPO) market, IPO underpricing and the long-run performance of IPOs and to nd out the ex ante
difference in the market structure between the pre-, during and post-periods of the Unremunerated
Reserve Requirement (URR) at the 30 per cent rate.
Design/methodology/approach – The sample is a total of 245 IPOs listed on the Stock Exchange of
Thailand (SET) and the Market for Alternative Investment (mai), during the period 2001-2012. The
explanatory variables consist of the age of the rm, the offer size, the time-lag between the IPO date and
the rst trading date, the proportion of shares owned by the government and the IPO subscription rates
by foreign and institutional investors. In further analysis, the authors adopt a two-stage least squares
approach to derive unbiased estimates of the relationship between government ownership, IPO
underpricing and rm quality.
Findings – We nd the ex ante uncertainty and earning management partially explain the IPO
underpricing phenomenon in the Thai IPO market. Our ndings support the impresario hypothesis
shown by the negative relation between underpricing and the three-year after-market. In addition, the
30 per cent URR imposition by the Thai Central Bank promptly reduced the number of IPO issues and
the proportion of foreigners and institutions subscribing to IPOs. However, it was able to enhance the
degrees of IPO underpricing and the long-run performance of IPOs in Thailand.
Practical implications – The results presented in this paper may be, therefore, useful for investors,
security analysts, companies and regulators in many other emerging markets beyond Thailand. Given
the results from the over-performance of IPOs in the post-URR period, investors may do better holding
Thai IPOs for a long period with a likelihood of gaining a higher return.
Originality/value – This paper contributes to the literature concerning IPOs – in that we have
considered two stock markets, namely, SET and mai. Furthermore, unique data such as the government
ownership and proportion of IPOs subscribed by foreign and institutional investors are taken into
consideration in our research model. To the best of our knowledge, for the rst time in the Thai IPO
The authors are grateful for valuable comments and suggestions from an anonymous referee and
from John Ashton (the editor). They thank the ofcials at the Information Technology Department
of the Stock Exchange of Thailand, in particular Thammanoon Kasemsuppakorn, for helping
provide them with such data. All errors are the authors’.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
The Bank of
Thailand
affects IPO
317
Journalof Financial Regulation
andCompliance
Vol.24 No. 3, 2016
pp.317-342
©Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-09-2015-0052
market, the effect of the 30 per cent URR on IPO underpricing and the performance of IPOs in the
long-run has been closely examined.
Keywords IPOs, Underpricing, The Stock Exchange of Thailand,
The unremunerated reserve requirement (URR)
Paper type Research paper
1. Introduction
In 2006 the Thai Baht was a standout unit in the region against the greenback (or US$),
and the Baht/US$ exchange rate appreciated by about 15 per cent due to large capital
ows into Thailand and high speculation on the Thai currency, putting great pressure
on the key exporters. In common with other international markets, capital inows are
more likely to be transferred from country to country via nancial market channels,
especially equity and bond markets. Capital inow causes a risk of real exchange rate
appreciation and damages the potential development of tradable sectors (Dooley, 1996;
Concha et al., 2011). Evidence of speculation on the currency was also detected by the
Bank of Thailand (BoT). In the meantime, Thai exporters were less competitive on
the global market. Therefore, to boost exports and also prevent a speculative attack on
the Thai currency, a new regulation imposing capital controls on inbound payments of
foreign currency, namely, the Unremunerated Reserve Requirement (URR) at 30 per cent
rate, was promptly announced to the public on the evening of 18 December 2006 by the
BoT. The promulgation of this new regulation severely shocked several investors,
particularly the foreign ones. As a consequence, the Stock Exchange of Thailand (SET)
index decreased rapidly from 730.55 on 18 December to 622.11 on 19 December 2006,
dropping in fact by 14.83 per cent. This also led the SET to use the “Circuit Breaker[1]”
twice the very next day after announcing the new regulation.
Initial Public Offerings (IPOs) have been studied extensively in the nance literature
focusing on such interests as the IPO underpricing phenomenon and the long-run IPO
underperformance. Recently, there has also been some empirical literature examining
the impact of regulatory changes on the performance of IPOs. For example, Cheung et al.
(2009) investigated the dynamic between underpricing and various underlying factors
of Chinese IPOs, listed between 1992 and 2006 under four regulatory regimes. Marisetty
and Subrahmanyam (2010) studied the IPO performance in the Indian market from 1990
to 2004, monitoring the effect of regulatory changes. Ekkayokkaya and Pengniti (2012)
investigated governance reform in the 1997 East Asian nancial crisis and Thai IPO
underpricing. However, the effect of capital control by the URR on the IPO stock market
and performance does not appear yet to have been closely studied. This investigation,
currently being undertaken, will therefore contribute to capital-market regulation and
IPO studies; this recent event will be analysed and attempts will be made to discover
exactly how the capital controls inuenced the initial return and long-term return of
IPOs in Thailand. Foreign and institutional IPO subscription rates will then be
considered. Finally, a large amount of IPO data from both Thai stock markets, namely,
the SET[2] and the Market Alternative for Investment (mai[3]), will be used in this
research. This particular study aims to investigate the characteristics of the IPO market
and IPO underpricing and to nd out the ex ante difference in the market structure
between the pre-, during and post-periods before and after the URR announcement of the
30 per cent rate. According to the SET database, a total of 258 rms went public between
2001 and 2012 in Thailand. However, our sample consists of 245 IPOs or, in other words,
JFRC
24,3
318
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