Sponsor Backing in Asian REIT IPOs

See Ritter and Welch (2002) and Ljungqvist (2008) for comprehensive reviews on the IPO literature.

See Michaely and Shaw (RFS, 1994) and Ghosh et al. (2000).

The literature has examined the influence and roles of venture capital sponsors, private equity fund sponsors, and managers in the IPO (Barry et al. 1990; Gompers 1996; Chemmanur and Paeglis 2005; and Katz 2008), but not for REIT IPOs.

Other ways to signal quality are through the reputation of the underwriters (Booth and Smith 1986), auditors (Titman and Trueman 1986), venture capitalists (Barry et al. 1990; Megginson and Weiss 1991), management quality (Chemmanur and Paeglis 2005).

Exceptions are Michaely and Shaw (1994) who model the underpricing and the size of seasoned equity offerings jointly using a simultaneous equations model. Habib and Ljungqvist (2001) on the other hand model issuer wealth losses, underpricing, and the costs of promoting the issue jointly using equation-by-equation OLS estimator. Unlike ours, both these studies treat the number of shares retained by the issuers as exogenous with respect to underpricing.

Broadly, sponsors provides three types of support to the REIT—pipeline support, warehousing facility and management expertise—that are formalized into various sponsor support agreements.

This sponsor definition does not differentiate between sponsors and advisors even though there are a few isolated instances where advisors are not sponsors. However, because these advisors hold large stakes in the REIT, we classify them as sponsors. The results are robust when we use main sponsor ownership in the REIT instead of aggregating all shares owned by all the sponsors/advisors.

Our decision to use first fiscal report ownership data is due to the language constraint in extracting Japan REIT (JREIT) ownership data on IPO date. We expect that the first fiscal ownership data is a close proxy to ownership structure on IPO date due to locked-up provisions imposed on issuers by underwriters in Asian stock markets. Firm management and pre-IPO shareholders (sponsors) are often not allowed to dispose their shares in the aftermarket for a period of time after the IPO (typically 180 days). Inspection of non-JREIT sample where we have both ownership data at and post IPO show that the correlation for these variables is 0.90 (significant at less than 1% level). Moreover, tracking of JREITs ownership data over time reveals that sponsor ownership does not change during the first two fiscal periods (1 year).

There are two explanations to the positive relation between premarket demand and underpricing. Benveniste and Spindt’s (1989) model of IPO underpricing argue that partial adjustment phenomenon happens when the IPO final offer price do not fully reflect the positive premarket demand as the underwriters wish to reward institutional investors for truthfully revealing their true positive demand during the book-building process by offering them underpriced shares. Loughran and Ritter (2002) on the other hand suggest that a positive upward revision implies that pre-IPO shareholders are experiencing increase in wealth much higher than they have anticipated, hence, they are more willing to tolerate for a higher level of underpricing than following an downward revision in the final offer price. Both these models predict a positive relationship between underpricing and premarket demand. We attempt to disentangle these theories in a subsequent section.

Similar to Riddiough and Wu (2009), we also reproduce our 2SLS results using an iterated 2SLS procedure which iterates over the estimated disturbance covariance matrix and parameter estimates until the parameter estimates converge. This procedure minimizes the sum of squared errors. Our results are robust to this estimation procedure (results not produced here but are available upon request from the authors).

To illustrate wealth gain and dilution costs of underpricing, consider CapitaRetail China Trust’s December, 8, 2006 offering that had 191.23 million shares retained by its sponsor, i.e. CapitaLand, 193.3 million newly issued shares (no secondary shares sold by pre-IPO shareholders) in its offering at $1.13. The first closing market price was $1.80, and the midpoint of the file price range was $1.04. So for the 191.23 million shares retained, the revaluation of $0.76 ($1.80–$1.04) per share resulted in a wealth gain of $145.33 million (191.23 million × $0.76). Thus the total wealth change was $145.53 million for the sponsors, as contrasted with the $112.29 million left on the table [($1.80–1.13) × 193.3 = 129.51] × 86.7% owned shares by the sponsors before going public]. Although the sponsor left $112.29 million on the table, the wealth gain of $145.53 million more than offsets the dilution costs from underpricing, providing a net wealth gain of $33.2 million.

We also check for the asymmetric component in Premarket demand by creating a dummy variable, Premarket demand (0,1), equal to one if the offer price is at the upper end (maximum) of the filling range, and zero otherwise. Premarket demand (0,1) itself is positively significant at the 1% level in the underpricing equation (negative, and significant at the 5% level in sponsor ownership equation) and did not change the other coefficients.

Our results are also robust to incorporation of year dummy variables in Models 1 and 2 in Table 5.

Sponsor turnover is a material event due to the intimate relationship between the REIT and its sponsors. Change in sponsors often leads to the change in REIT name and the disposal of IPO sponsor’s shares in the advisory company and the REIT to a new sponsor.

Details available upon request.

Our results do not change when we exclude the underpricing variable from the regression models.

Our results are robust to the incorporation of Premarket demand into the regression models in Table 7. The coefficients for Premarket demand however turn insignificant once we control for Wealth change, suggesting that the positive link between Premarket demand and Underpricing is mainly driven by Loughran and Ritter’s (2002) wealth gain story.