TWO former senior employees of UOB Kay Hian Private Limited (UOBKH) were charged on Wednesday for allegedly lying to the Monetary Authority of Singapore (MAS) in relation to reports on a then Catalist aspirant. Lan Kang Ming, 38, and Wee Toon Lee, 34, each face three charges of providing MAS with false information in October 2018 in relation to due diligence reports on an unidentified company applying to list on the Catalist board of the Singapore Exchange. MAS said in a media statement on Wednesday that it was performing an onsite inspection of UOBKH between June and August 2018, to assess the latter's controls, policies and procedures in relation to its role as an issue manager for Initial Public Offering (IPOs). During the examination, Lan and Wee were said to have provided different versions of a due diligence report relating to background checks on a company applying to be listed on the Catalist board of the Singapore Exchange. UOBKH had acted as the issue manager
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By R SIVANITHY
Intuitively, most investors would know that an illiquid stock is riskier than a liquid one and, all other things being equal, should therefore command a lower price.
Finance theory actually confirms this intuition. Stocks that are not actively traded lead to higher transaction costs through wider bid-ask spreads - which then means that, for any given level of risk, they require a higher expected return. The higher the required return, the higher the company’s cost of capital. Since a stock’s price is assumed to be the present value of future cash flows discounted at that cost of capital, the conclusion is that a higher cost of capital (or discount rate) then translates to a lower stock price. Ergo, illiquidity = lower prices.
(Note that this doesn’t apply to stocks which have been cornered or are tightly held - in which case finance theory goes out the window.)
The problem is that although many companies know that inactive trading of their shares is detrimental to shareholder wealth, few actually bother to do anything about it.
Consider, for example, that over the 10 trading sessions from Jan 17 to 31, the top 50 most actively traded stocks on the Singapore Exchange (SGX) on average accounted for a staggering 82 per cent of daily turnover measured in dollars.
Meaningful daily turnover
This means that a huge proportion (just over 90 per cent) of the 800- plus listed entities on SGX do not record much meaningful turnover every day - this, in a low-interest- rate, high-earnings-growth environment that is supposed to be bullish for stocks.
Why don’t companies take the initiative and try and boost liquidity?
The main reason is the belief that once they are listed, their fate is predominantly in the hands of outsiders or forces beyond their control. So poor liquidity is then blamed on Middle East unrest, inflation worries, the exchange, brokers, underwriters or sponsors not doing their job, China’s tightening measures, US Federal Reserve policy, and so forth.
While external factors undoubtedly play a major role in influencing liquidity - rising interest rates, for example, would surely drain quite a bit of money from the system - by the same token, sitting still and wringing one’s hands while claiming to be powerless is only going to aggravate the problem and diminish shareholder value.
One way to try and improve liquidity is through increased disclosure because the more information given to the market about one’s company, the greater the chances that investor interest and then liquidity might be stimulated.
One example of how to do this is provided by listed properties group Second Chance Properties (SCP), which last month released answers to a series of frequently asked questions that give readers a good insight into how the company works, where its growth comes from and what its prospects are.
It also provides an insight into how the company’s management thinks and its ability to formulate imaginative ways of communicating with the market.
Change listing rules
It’ll certainly be interesting to see if the move does indeed raise SCP’s liquidity in the months ahead but one thing is certain: it doesn’t cost much, but the potential benefits are considerable.
The regulatory authorities can also play a part. For instance, SGX might also consider changing the listing rules to force companies to have larger shareholder bases. Currently, Catalist aspirants need to have a spread of only 200 shareholders at listing (compared to 500 when Catalist was Sesdaq). There is plenty of evidence in the finance literature that having more shareholders results in better bid-ask spreads, which in turn increases liquidity (see, for example, Number of Shareholders and Stock Prices: Evidence from Japan by Amihud, Mendelson & Uno, Journal of Finance 54 (1999)).
Whatever the options, the ultimate goal has to be to increase liquidity because to do nothing and leave stocks to languish in low volumes would be to do investors and shareholders a disservice.