Schedules
Author(s): Philip J. Lee, Stephen L. Taylor and Terry S. Walter
Source: The Journal of Financial and Quantitative Analysis, Vol. 34, No. 4 (Dec., 1999), pp.
425-444
Published by: Cambridge University Press on behalf of the University of Washington
School of Business Administration
Stable URL: https://www.jstor.org/stable/2676228
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JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS VOL 34, NO. 4, DECEMBER 1999
Abstract
Initial Public Offers (IPOs) made on the Stock Exchange of Singapore routinely p
sufflciently detailed data to allow reconstruction of both the application and all
schedules. We show that large investors tend to preferentially request participation
with higher initial returns, consistent with these investors being better informed.
show that inferences based exclusively on application strategies are quite different
those drawn on investor allocations. Our results suggest that caution is necessary in
ing the relative merit of competing explanations for IPO underpricing where the unde
demand is not identified.
I. Introduction
* All authors, Department of Accounting (H04), University of Sydney, NSW 2006, Australia. T
paper has benefited from comments by participants at the 1996 PACAP/APFA annual meeting
well as workshops at the following universities: Sydney, Adelaide, Western Australia, Macquarie,
Queensland. The authors gratefully acknowledge these comments. They also acknowledge deta
comments and suggestions received from Philip Brown, Paul Malatesta (the editor), and Ivo W
(associate editor and referee).
following pre-selling, U.S. underwriters must set a common price for all investors (Benvenist
and Wilhelm (1990)). The subsequent offers of shares reflect underwriters' allocation discretion,
well as the information gained from pre-selling. Hence, "applications," as such, will already refle
both the information provided in the pre-selling period and the underwriters' ability to discrimin
between applicants.
2It is possible that investors might strategically apply for a larger number of shares than th
actually want in an issue. To do so, however, involves an additional application cost, and an increa
425
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426 Journal of Financial and Quantitative Analysis
II. Background
A. Prior Research
probability that, if the issue is overpriced, they will face the consequent winner's curse. M
on the cost structure and institutional arrangements in Singapore IPOs is provided in Sectio
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Lee, Taylor, and Walter 427
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428 Journal of Financial and Quantitative Analysis
B. Institutional Arrangements
The main features of the Stock Exchange of Singapore's (SES) IPO mar?
ket are described in Koh and Walter (1989), Saunders and Lim (1990), and Lee,
Taylor, and Walter (1996b). These papers highlight that:
i) Rationing of shares in over-subscribed issues is evenhanded; all investors
who apply for the same number of shares in an IPO have an equal probability
of receiving an allocation.
ii) Disclosure of the rationing process is provided routinely, allowing the re-
searcher to determine, conditional on various application strategies, the ex
post probability of success.
iii) Sufficient post-issue disclosure is frequently made to allow estimation of the
demand schedule, allowing the researcher to observe the application pool for
an issue, the rationing process used in the issue, and the actual allocation
distribution for the issue.3
3 Some corporate disclosures made in Singapore IPOs allow the researcher to estimate the prob?
ability of receiving an allocation conditional on the number of shares applied for, but do not give
sufficient details to allow the demand schedule to be reconstructed. For example, a disclosure might
indicate that one in 10 investors who applied for 1,000 shares were randomly selected as success-
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Lee, Taylor, and Walter 429
Previous Singapore research has utilized the disclosures in i) and ii). Koh and
Walter (1989) and Lee, Taylor, and Walter (1996b) show that there is a systematic
preference for the applications of smaller investors in the allocation process, pos-
sibly induced by the listing requirements of the SES. Both papers also show that
large investor demand is significantly more responsive to expected levels of un?
derpricing (proxied by realized underpricing) than demand in smaller investor size
categories. However, neither study exploits data contained in the full application
and allocation schedules for the Singapore IPO market to show small and large
investor profits and losses. This paper employs the 91 (out of 132) IPOs made in
the period July 1973 to December 1992 with sufficient disclosure to reconstruct
the application and allocation proportion and split these into groups based on the
application size.
These features of the Singapore IPO market mean that the observable de?
mand for an issue is not dampened by any ex ante expectation that a particular
issue will be discretionally allocated to favored clients of the underwriter, issuer,
or broker for the issue.4 That demand is not dampened by discriminatory allo?
cations has, however, resulted in quite pervasive over-subscription levels. Lee,
Taylor, and Walter (1996b) document a median over-subscription level of 14.1
times for the 128 Singapore IPOs included in their study. Chowdhry and Sher-
man (1996b) suggest that, given high levels of over-subscription, the cost to the
issuing firm of underpricing may be mitigated by the interest earned on the sub?
scription pool. To investigate this, we calculated a standardized measure of the
interest on the subscription pool expressed as a percentage of the issue size. Our
standardized interest measure shows a maximum interest accruing to the issuer of
39% (this issue was priced at 65<?, came on to the market three days later at $1.93
and was over-subscribed 783 times), though nearly 70% of issues have a value
at less than 1%. This can be compared to the average underpricing we report in
Table 1 of 31.73%. We conclude that the interest on the subscription pool is not a
major incentive to underprice.5
It is also worth noting that the IPO process in Singapore follows the general
principles of British law and, thus, the offer price must be set and stated in a
prospectus prior to a formal invitation to the public to apply for shares. The
elapsed time between fixing an offer price for inclusion in the prospectus and the
listing of the shares averages four to five weeks. Comparing evidence for different
countries, Loughran, Ritter, and Rydqvist (1994) suggest that the longer the time
period between setting the offer price and listing, the greater will be the level of
underpricing, conditional on the offer not being withdrawn.
Another feature of relevance in this paper is the SES listing rule, which re?
quires a minimum percentage of the issued capital (after excluding the holdings
of directors, the parent company, and companies associated with the parent com?
pany) to be held by shareholders who hold between 500 and 10,000 shares. The
ful, but the proportion of the total issue allocated to such investors is not disclosed. Koh and Walter
((1989), pp. 270-271) provide an example of both a "complete" disclosure and a "partial" disclosure.
4Typically 10% of the issue is reserved for staff of the issuing company. Seventy-five of the 132
IPOs had a 10% staff priority entitlement.
5The statistics for the interest on the subscription pool expressed as a percentage of issue size are:
mean 1.53, median 0.49, standard deviation 3.81, maximum 39.04, minimum 0.01, deciles 4.28, 1.89,
1.13, 0.79, 0.49, 0.27, 0.16, 0.08, 0.04, 0.01.
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430 Journal of Financial and Quantitative Analysis
TABLE 1
a Underpricing = The last sale on the first day of listing minus the subscription price, divided by the
subscription price, multiplied by 100 (%).
Over-subscription = The multiple by which total applications exceed available shares (times).
Age of the firm = Length of prior operating history of the firms (years).
Retained ownership = Proportion of the equity retained by previous owners (%).
Listing lag = Time between prospectus registration and exchange listing (days).
Log of issue size = Natural log of equity issue size * (Singapore $ millions).
Log of total assets = Natural log of total assets after initial equity issue * (Singapore $ millions).
250-, 500-, 750-Day wealth relatives = The investment performance of the observation relative to a
market return over the relevant number of trading days. The beginning point for the wealth relative is
the first day listing price (ratio).
Number of firms = The number of firms used in the calculation of the relevant wealth relative (firms).
The number of observations for the 500- and 750-day wealth relative decreases due to truncation of
the share price series at Dec. 31, 1993. No sample company failed or delisted during the period of the
study.
* These figures are CPI-adjusted to a Jan. 1993 base, to reflect a constant dollar value. For comparison
purposes, the exchange rate between the Singapore dollar and the U.S. dollar increased during the
study from approximately 2.1S$: 1 US$ to 1.4S$: 1 US$.
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Lee, Taylor, and Walter 431
minimum percentage varies from 10% (for issues with paid-up capital of $150
million or more) to 20% (for issues with a paid-up capital of $50 million or less).
This rule creates a bias in favor of smaller investors, clearly evident in Koh and
Walter's (1989) figure 2, which shows that the probability of receiving an alloca?
tion of shares for a 1,000 share application (0.35) is more than twice the proba?
bility of success (0.16) when 1 million shares are sought. However, whether this
bias actually reduces the extent of any winner's curse (as suggested in Chowdhry
and Sherman (1996a) has not been addressed empirically.
We use a combined sample of IPOs previously studied by, and described in,
Koh and Walter (1989) and Lee, Taylor, and Walter (1996b). During the period
from July 1973 (which marks the inception of the SES) to December 1992, there
were 132 IPOs. We manually searched the company files at the SES library to
extract details of the application and allocation patterns for each issue. Ninety-
one issues provided sufficient information to allow us to estimate the total demand
schedule for the issue (see the Appendix for details of the estimation methods
used), classified by size of application. The reasons why data are not available for
41 IPOs are as follows:
i) Prior to June 1978, detailed disclosure of demand for the issue was not re?
quired and was rarely provided on a voluntary basis (22 out of the 25 IPO
made between January 1973 and June 1978 did not voluntarily disclose the
demand schedule).
ii) Six IPOs were under-subscribed and they did not provide sufficient details t
allow demand to be determined.6
iii) A further 13 IPOs were over-subscribed but the details of the application
patterns cannot be estimated from the (less complete) information disclosed.
Nine of these come from the earlier IPOs studied by Koh and Walter (1989)
6Of these six omitted (under-subscribed) firms, three were overpriced (by an average of 8.2%).
Another two firms were underpriced (by an average of 7.0%) and one was neither over- nor under
priced. These omissions may introduce a bias to the results.
7The mean over-subscription for these was 21.0 times, and the median was 8.0.
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432 Journal of Financial and Quantitative Analysis
excluded IPOs Ostatistic 2.00), but firm size as measured by total assets, is in-
significantly different (/-statistic 1.27) between the two groups. The lag between
the prospectus date and the listing date is significantly smaller (7-statistic 2.09) for
the included firms. This is also expected as a result of efficiencies associated with
technology improvements introduced into the IPO process over the sample period,
and also because under-subscribed offerings are probably shopped longer. Across
all other dimensions (retained ownership, age, and three measures of long-run
performance), the included and excluded firms have similar characteristics.
As noted in Lee, Taylor, and Walter (1996b), there is no evidence that Singa?
pore IPOs display poor long-run performance of the type encountered in several
international studies (see Loughran, Ritter, and Rydqvist (1994)). Further, while
initial underpricing is significantly positive, Koh and Walter (1989) and Lee, Tay?
lor, and Walter (1996b) show that once the probability of receiving shares in an
issue is considered, initial returns are insignificantly different from the risk-free
rate of interest. This result is consistent with the prediction (for uninformed in?
vestors) of Rock's (1986) equilibrium model of why new issues are underpriced.
A direct test of Rock's model requires data on the rationing process used in each
IPO, and this information is routinely supplied to the market in Singapore. The
probability of an allocation, conditional on the quantity applied for, can be estab-
lished for 128 of the 132 IPOs; these probabilities were used in previous Singa?
pore tests of Rock's model; however, the more stringent disclosure requirements
that we impose restrict the analysis to 91 firms.
Figure 1 plots the difference in the allocation proportion and the applica?
tion proportion for investors in four categories (small, medium/small, medium,
and large investors) for each ofthe 91 issues. Small investors are defined as those
who apply for up to $5,000 dollars worth of shares in each issue, medium/small in?
vestors apply for $5,001 to $50,000, medium investors apply for $50,001
to $250,000, and large investors are defined as those who apply for more than
$250,000 worth of stock. It is clear in Figure 1 that large investors are allocated
relatively less than they apply for, when compared to small investors. The data on
which Figure 1 is based show that large (informed) investors, on average, account
for approximately half the applications, though they are allocated only 28%. In
contrast, small (uninformed) investor demand constitutes, on average, 12% ofthe
applications, but they receive an average of 32%.
An analysis of the IPOs plotted in Figure 1 shows that the range of appli?
cation proportions differs considerably from the allocation proportions. Large
investors had a minimum demand of zero (as too did medium investors for one
issue that was underpriced by significantly less than the average underpricing for
the sample) and a maximum demand of 97.55% (the issue was the most heav-
ily over-subscribed IPO and it was the most underpriced; small investors were
crowded out of this particular issue and accounted for only 1.22% of the total ap?
plication pool for the issue, though they were allocated 20.2% ofthe shares). We
examine these matters in greater detail in subsequent regression analysis, but point
out that substantial differences in application and allocation proportions mean that
inferences drawn solely from an analysis of allocations may give a false picture
of application proportions for the Singapore IPO market. Likewise, the allocation
data examined by Hanley and Wilhelm (1995) may also disguise the underlying,
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Lee, Taylor, and Walter 433
unconstrained demand for U.S. IPO shares, making a reliable test of this particular
prediction of Rock's (1986) winner's curse model difficult.
Panels A, B, and C of Table 2 combine the information in Figure 1 with data
on issue size and underpricing to develop total profit (loss) statistics for all 91
issues, and separately for the underpriced issues (84) and the overpriced or fully
priced issues (seven). The profit (loss) statistics in panels A, B, and C of Table
2 are developed using the actual allocations for each issue and show that large
investors made an average gross profit before application and information search
costs of $3,897 million per issue, while small investors made $3,766 million per
issue. The total realized value of the information advantage of large investors
is $11.9 million for the 91 issues. However, as shown in Figure 1 and further
quantified below, large investor gains are scaled back by the allocation system
used in Singapore. The maximum profit earned by large investors is $54,122
million, while their maximum loss is $31,189 million.8 Across all issues, $920.7
million dollars are left "on the table" (i.e., 91 times the sum of the mean profits
for the four application size categories). In underpriced issues, the total gain to
investors is $1,078.6 million, while the total loss in overpriced issues is $157.9
million. Large investors are shown to make substantial gains ($406.6 million) in
the 84 underpriced issues (which are 12 times as likely for our data), but they also
suffer some large losses ($52.0 million) in the seven overpriced issues.
Panels D and E of Table 2 show the wealth transfer associated with the fa-
vorable treatment small investors receive in rationing IPOs, which was evident
in Figure 1. Panel D shows the wealth transfers and panel E shows profits that
would have been achieved by each investor category if allocations were strictly
proportional to applications. The systematic favoring of small investors results
in an average increase in profit per issue of $2,674 million for small investors,
whereas large investors have their profits reduced on average by $2,630 million.
Large investors apply for issues that would produce average gains of $6,527 mil?
lion, but the allocation process scales these profits back to an average gain of
$3,897 million. Median results show similar patterns of profit transfer from large
to small investor categories. The application data can also be used to estimate
the information advantage that large investors have over small investors. Large
investors apply for issues that would have realized gains of $6,527 million per
issue, whereas small investor applications would have produced gains of $1,092
million per issue. The total value of this information advantage is $494.6 million
for the 91 issues. However, as we have shown here, allocations in Singapore IPOs
systematically favor small investors, reinforcing our point that inferences drawn
from allocations are quite different to those based on applications. Hence, tests
of competing IPO pricing models (e.g., Hanley and Wilhelm (1995)) that rely
on allocation decisions may not produce the same conclusions as tests based on
application decisions.
8The maximum loss occurred for DBS Land, which issued 300 million shares at $1.35. These
shares ended trading on the first day at $1.03 (above the low of 80<?), giving investors a loss of $96
million ((1.03 ? 1.35) * 300 million). This loss was then adjusted for the change in the CPI between
October 1987 and the CPI base of January 1993 by applying a factor of 86.8.
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434 Journal of Financial and Quantitative Analysis
FIGURE 1
Differences in the Application and Allocation Proportions for Various Investor Classes
r Small
Medium/small
Medium
Differences in the application and allocation proportions for various investor classes (based
on dollar value of applications), from 91 Singapore IPOs made between July 1973 and
December 1992 that have sufficient data disclosed to allow the application and allocation
proportions for the issue to be reconstructed. The vertical axis is the change (bias) between
the application and allocation proportion.
P, = a + /HP,- + e,
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Lee, Taylor, and Walter 435
TABLE 2
a Small investors are defined as those who apply for up to $5,000 dollars worth of shares in each issue,
medium/small investors apply for $5,001 to $50,000, medium investors apply for $50,001 to $250,000,
and large investors are defined as those who apply for more than $250,000 worth of stock.
The results in Table 3 show that relative demand by large investors is significantly
positively associated with underpricing, consistent with large investors being bet?
ter informed.9 Indeed, demand by the largest investors is sufficient to reduce the
proportional applications and allocations in the three smaller investor categories,
9We repeated the regressions in Table 3 using weighted least squares, where the weights are the
size of the issue. The unreported results are very similar to those reported.
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436 Journal of Financial and Quantitative Analysis
TABLE 3
P/ = ot+p\Pi+et
where / = 1,2,..., number of observation firms;
P = proportion for small, medium/small, medium, and large application
locations;
IP = initial profits in millions of Singapore dollars.
*Significant at 5%
**Significant at 1%
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Lee, Taylor, and Walter 437
repeat the regressions in Table 3 using underpricing, rather than initial profits as
the dependant variable, our results are similar to, though somewhat weaker than,
those reported in Table 3.
Koh and Walter (1989) report that the Spearman rank correlation coefficient
between the over-subscription level and underpricing in their sample (n = 66) is
0.951, which is significant at the 1% level. Lee, Taylor, and Walter (1996b) report
results for a univariate regression of over-subscription on underpricing (n = 128),
which is also significant at the 1% level. Table 4 explores these issues further.
For each of three samples (all 91 IPOs, the 46 least underpriced IPOs, and the
45 most underpriced IPOs), we regress the level of over-subscription achieved
within four investor categories (small, medium/small, medium, and large) on ini?
tial underpricing. Rock's (1986) theory predicts that, among other things, the
estimated coefficients, which are measures of how responsive investors are to
expected underpricing (proxied by actual underpricing), should reflect their infor?
mation advantage. For example, Rock's (1986) model also predicts that issuers
intentionally underprice IPOs to overcome the adverse selection problem that un?
informed investors face in dealing in a market in which informed traders exist.
Looking first at panel A for all 91 IPOs, the results are strongly in accord with
this theory, providing that the value of shares applied for is a valid proxy for the
information advantages of groups. While small investor demand expansion is sta?
tistically significant (each 1 % increase in underpricing results in small investor
demand expanding by 7.9%), it expands far less markedly than large investor de?
mand (each 1 % of underpricing causes demand to expand by 176.7%, or 22 times
as much). Rock ((1986), pp. 194-196) noted that it is essential to establish that
uninformed demand expands as the issue price is reduced. This creates an in?
centive for the issuer to underprice, because underpricing increases the chance
of achieving full subscription in the event of informed demand being withdrawn
(i.e., the issue is overpriced). It is also worth noting that the panel A regressions in
Table 4, with the adjusted R2s in the range of 0.2467 (small investors) to 0.3088
(medium/small investors), indicate that underpricing explains over-subscription
levels within investor size categories quite well.
Further evidence consistent with demand expansion by informed investors is
presented in the sub-category results drawn by dividing the sample at the median
level of underpricing. For the most underpriced subsample in Table 4, panel C,
large investor demand expands sufficiently (the coefficient is 278.3)10 to crowd
out uninformed investors, and small investor demand expansion is no longer sta?
tistically significant. The reverse is true for small investor demand in the least
underpriced subsample in panel B; where small investor demand expansion is
statistically significant at the 1% level.11
10White's f-statistic is significant at 5% in Table 4 whereas the raw f-statistic is 3.931. This result is
influenced by one extreme observation caused by the most heavily over-subscribed (and most under?
priced) issue. White's f-statistic increases to 2.035 (significant at 1%) when this outlier is removed.
12The standard error of the estimate for the underpricing coefficient on this regression is 32.4. Thus,
it is clear that some of the least underpriced IPOs still attract significant informed demand. White's
(1980) adjusted f-statistics were also calculated. These are consistent with the reported results, except
that the f-statistic for large investor demand expansion for the most underpriced issues is significant at
5%, rather than at 1%. The weaker result is caused by one extreme observation.
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438 Journal of Financial and Quantitative Analysis
TABLE 4
OS/ = a + pUPj + e,
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Lee, Taylor, and Walter 439
Table 5 further explores the issue of demand expansion. Here, our concern
is to determine the extent to which applications by (and allocations to) investors
in each of the four size categories are explained by the level of over-subscription.
It is clearly evident in the Table 5 result that, overall, over-subscription levels
are determined by the large investor group. The estimated coefficients of 0.0012
for applications and 0.0010 for allocations have f-statistics of 3.05 and 4.17, re?
spectively. In sharp contrast, all six coefficients for the three smaller investor
categories are significantly negative.
TABLE 5
P/ = a + pOSj + e,
where / = 1,2,..., number of observation firms;
P = proportion for small, medium/small, medium, and large applications or al?
locations;
OS = over-subscription.
*Significant at 5%
**Significant at 1%
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440 Journal of Financial and Quantitative Analysis
C. Long-Run Returns
We further explore the issue of whether long-run IPO returns are associated
with initial demand for the issue. Specifically, we constructed an index of the
level of informed demand for an issue by dividing the over-subscription level for
large investors by the sum of the over-subscription levels for the other three cat?
egories. IPOs with larger values for this statistic have a larger level of informed
demand. This proxy for the level of informed investor participation in an IPO was
regressed on the 250-, 500-, and 750-day wealth relatives for the sample. Field
(1997) shows that IPOs that have larger institutional shareholdings at the end of
the quarter after listing have better equally-weighted long-run (three-year) abnor?
mal returns. However, we are unable to find any significant association between
long-run performance and our proxy for the level of informed investor participa?
tion in the IPO. This is in contrast to our evidence that informed investors reveal
their information advantage in relation to initial IPO underpricing in Singapore.
IV. Conclusions
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Lee, Taylor, and Walter 441
Appendix
The following is the full text of an announcement made by United Merchant
Bank Limited (the underwriter) on April 19, 1988 for and on behalf of Fuji Offset
Plates Manufacturing Ltd (the issuer).
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442 Journal of Financial and Quantitative Analysis
ANNOUNCEMENT
4. The Board of Directors wishes to thank all applicants for their inte
the Company. Unsuccessful applications and refund cheques for s
will be sent to applicants as soon as possible.
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Lee, Taylor, and Walter 443
0.367*4,250,000*25/10* 1,000
?>i
1,000
= 3,899,375 shares.
Thus, we estimate that there were 3,899.375 applications for 1,000 shares giving
an over-subscription rate of 0.9175. That a minimum parcel was 1,000 shares for
this issue means that some rounding error exists in this calculation. It is probable
that 3,900 or 3,899 applications were received. The subscription price per share
for this issue was $0.75, thus 1,000 shares would cost $750. This is less than the
upper limit ($5,000) of our definition for the cost of shares for small investors,
while a subscription for 2,000 shares (the smallest application size in the next dis-
closed category) would cost $1,500. This is again less than the $5,000 upper limit
(and, hence, will be included in the small category), though the next category has
a cost of $7,500 and is, thus, in the medium/small category. The estimated number
of shares applied for in category D2 is 1,782,639. Thus, the over-subscription rate
for small investors is estimated at (3,899,375 + 1,782,639)/4,250,000 or 1.3369
times.
Another source of rounding error exists in our calculations because we do
not know the distribution of applications within a range. Here, we assume all
applicants apply for the smallest number of shares in a range and, thus, our esti?
mates of demand are downward biased. To illustrate this rounding error, we show
below, in summary, all analogous calculations for this issue.
Medium/small demand over-subscription is estimated at 1.4525 times, medi?
um demand results in an over-subscription rate of 2.2833 times, and large in?
vestor demand is over-subscribed 5.6583 times. Our total demand is estimated as
10.7310 times, whereas actual over-subscription was 11.0273 times.
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