Cash Flow Uncertainty and IPO Underpricing: Evidence from Thai REITs

REIT IPOs in Thailand are less underpriced than stock IPOs (2.45% compared to 23.0%), which is a common finding across many international markets (Chan, Chen and Wang, 2013). One of the most common explanations for IPO underpricing is adverse selection arising from information asymmetry. However, research in IPO tends not to investigate this issue directly due to the difficulty in estimating ex-ante uncertainty. REITs provide a unique research setting because some REITs enjoy income guarantee, which can reduce cash flow uncertainty. We find that REITs with income guarantee are much less underpriced on average, corroborating the linkage between cash flow uncertainty and IPO underpricing. We confirm that REITs with income guarantee tend to have lower systematic risk (measured by CAPM beta) and returns, making the nature of some REITs more debt-like than equity-like.