Abstract
In this study, we examine the stabilisation trades of United Rusal Company IPO’s shares listed on the Hong Kong Stock Exchange (HKEx) and of its Global Depository Shares (GDS) that were simultaneously listed on Euronext Paris. Using both Thomson Reuters Tick History data and the HKEx rules and regulation relating to stabilisation, we identify and analyse the trades that were very likely to have been executed by the stabilisation manager (Credit Suisse) on both markets. We identify nearly 95% of the stabilisation trades on the Euronext Paris, with somewhat less accurate results for Hong Kong. Our results show that the stabilisation trades generated a profit equivalent to about 2.72% of the gross proceeds for the two lead underwriters, a profit which is bigger than their total underwriting commission of 2.31%.
B. Saadouni—This project was completed while Brahim Saadouni was holding a Visiting Fellowship at the School of Banking & Finance, University of New South Wales, Sydney, Australia.
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Notes
- 1.
In the US, the overallotment option is known as Green Shoe option after the first IPO firm to grant over-allocation powers to its underwriters (Green Shoe Manufacturing).
- 2.
In some other markets (e.g., the US) two other types of stabilisation might be used. These are: (1) Pure stabilisation: Underwriters are required to signal their intention to stabilise by posting a stabilising bid with a flag which can be identified by other market participants. Pure stabilisation is hardly used by US underwriters as it would reveal that the underwriters were unable to allocate all of the shares on offer; (2) the lead underwriters use what is known as penalty bids. This allows the lead underwriters not to pay selling concessions to the syndicate member(s) whose clients flip the shares of the IPO firm soon after listing.
- 3.
The rule covers insider dealing, false trading, price rigging, disclosure of false or misleading information and stock market manipulation.
- 4.
It is the retail (uninformed) investors who face this as the informed (institutional) investors will only apply for the shares of the IPO firms if the offer price is less than the intrinsic value of the stock. Thus, IPO shares must be offered at a discount to ensure that uninformed investors do not withdraw from the IPO market.
- 5.
Poor IPOs are those firms that start trading at market prices below their offer prices.
- 6.
Underpricing is measured as the closing market price on the first day of listing minus the offer price divided by the offer price.
- 7.
This is the case of successful applicants who sell their allocated shares on the first few days of the IPO listing.
- 8.
These three groups of investors tend to lock-up their investments for a minimum period of six months.
- 9.
The total commission of 2.31% (assuming the incentive fee is paid by United Company Rusal Ltd) that the lead underwriters received is the fixed commission of 1.81% plus the incentive fee of 0.5% of the gross proceeds.
- 10.
Cornerstone investors include high net worth investors, sovereign wealth funds and corporate investors.
- 11.
It is worth pointing out that one of the authors contacted Credit Suisse Hong Kong regarding the case and they declined to provide details relating to their stabilisation trades. We have also contacted the HKEx who also declined to provide any data relating to the case due to confidentiality clauses with its members.
- 12.
We also employ Wharton Research Data Services (WRDS) code for robustness checks.
- 13.
Our results for the Hong Kong market may have over-estimated the profits that Credit Suisse made in the Hong Kong market as were not able to identify the stabilisation trades with a high degree of certainty. Our figures over-estimate the number of shares that Credit Suisse bought back by about 33%. Thus, the profit may have been HK$298.15 million.
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Quboa, Q., Saadouni, B., Shahgholian, A., Mehandjiev, N. (2017). Detecting Underwriters Stabilisation Trades: A Clinical Study. In: Feuerriegel, S., Neumann, D. (eds) Enterprise Applications, Markets and Services in the Finance Industry. FinanceCom 2016. Lecture Notes in Business Information Processing, vol 276. Springer, Cham. https://doi.org/10.1007/978-3-319-52764-2_3
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