First published in Business Times, August 22, 2014

BY

MAK YUEN TEEN, HO YEW KEE AND EUGENE KWEK

RECENTLY there has been considerable interest in stock exchange queries in Singapore. This comes in the wake of the penny stock saga involving three listed issuers – Blumont Group Limited, Asiasons Capital Limited and LionGold Corp Limited. The prices of the three stocks had risen rapidly over the first nine months in 2013, with Blumont in particular seeing a 12.5-fold increase in market capitalisation from S$508 million to S$6.3 billion.

The Singapore Exchange (SGX) issued queries about their price movements to Blumont on Sept 18, 2013, and Oct 1, 2013; to LionGold on Sept 26, 2013; and to Asiasons on Sept 9, 2013, and Sept 18, 2013. By Sept 30, 2013, the total market capitalisation of these three stocks was S$10.4 billion.

On Oct 4, 2013, the stock prices of Blumont, Asiasons and LionGold fell by 56 per cent, 61 per cent and 42 per cent, respectively. This prompted SGX to suspend trading in the three stocks. The issuers were queried regarding their drastic price drops. Two days later, the three stocks were declared “designated securities”, meaning that investors had to pay cash for purchases and they were prohibited from selling unless they held an equal quantity of stock. By the time the curbs were removed on Oct 21, 2013, some S$9.3 billion, or nearly 90 per cent, in the market value of these three stocks had been wiped out.

In the wake of this penny stock saga, the effectiveness of stock exchange queries has been questioned. In the case of the three issuers above, the queries were arguably not timely enough because they were experiencing price increases that could not be justified by their fundamentals before they were queried.

Before the drop in prices on Oct 4, 2013, Blumont and Asiasons had price-earnings ratios of 500 and 583 respectively and LionGold did not have any profits during the prior 12 months. Further, the usefulness of the responses to the queries was also questionable as no new explanation was provided in the issuers’ responses to SGX’s queries regarding their price increases.

For example, Asiasons explained that the price increase could be the result of its S$218 million deal to buy a 27.5 per cent stake in a US-based energy firm, which was already announced the day before. Similarly, Blumont replied that it was not aware of any information that might explain the increase in share price.

We have recently completed studies on how the stock market reacts to responses to queries in Singapore and Hong Kong. For Singapore, we looked at 387 responses to SGX queries from 2009 to 2012. We studied the responses to two types of SGX queries: price queries and disclosure queries.

Price queries are issued to address unusual price activity while disclosure queries serve to confirm market rumours, news or firm announcements. We did not examine queries relating to unusual trading volume because they were relatively rare during the period of our study. In this commentary, we focus on price queries as there was no significant market reactions to responses to disclosure queries.

We examined whether the stock market reaction to responses to price queries is dependent on the type of explanation provided and the pre-query price movement. We controlled for factors such as issuer size, year, industry and number of prior queries issued.

The responses were split into three categories: detailed new explanations, partial new explanations, and no new explanation. Responses that provided detailed new explanations included the following four main types of responses:

  • The issuer released new explanation together with the response or referred to an announcement made immediately or after the response;
  • The issuer confirmed or clarified financial reports in response to the query;
  • The issuer affirmed or clarified market rumours and speculation; and
  • The issuer gave further information on projects or activities not previously released to the market.

A response that provided partial new explanation covered situations where issuers disclosed that they were engaging in activities and discussions, which may affect future cash flows. However, no further details were provided which allowed investors to assess the impact of such activities or discussions. Or, the issuer stated that the activities were at a preliminary stage and further announcements were expected to be made in future.

Responses with no new explanation included two main replies:

The issuer explicitly stated that it was not aware of any possible explanation for the unusual trading activity; and

  • The issuer referred to previous announcements or reports that could explain the change in price or volume.

We used an event study methodology with a matched control sample, together with multiple regression analysis. We assessed cumulative abnormal returns over the event windows ranging from the day of the response itself, to up to three days after the response.

Of the 387 queries, 99 queries were price queries. These 99 price queries excluded many price queries that were eliminated from the study because there were other confounding events around the time of the responses to these queries, which would have made it difficult to assess the market reactions to the responses.

Queries have increased over time. Forty-two per cent of our sample relate to queries in 2012, compared to 5 per cent in 2009. This may be partly because disclosure queries were not published publicly in 2009, but more likely, it suggests that SGX has become more active in surveillance.

For the price queries, 80 per cent were for unusual price increases while 20 per cent were for unusual price decreases. This may be because the market experienced a recovery from 2009 to 2012 following the global financial crisis, and therefore there were more stock price increases than decreases. Of the responses to the stock exchange price queries, three quarters did not release any new explanation, with the remaining roughly equally divided between those which provided detailed new explanations and partial new explanations.

We then examined the market reactions to the different types of responses to price queries. We found that, on average, there was no reversal in stock price movement following a response of no new explanation, in the case of both a pre-query price run-up or price run-down. This suggests that investors generally did not believe the issuer when it stated that it had no new information for the unusual price movement and may have perceived the issuer to be hiding news from them.

We should point out that issuers may genuinely not know the reasons for a price run-up or run-down, but the market may not be able to differentiate them from issuers that choose to withhold material information.

There was a positive market reaction to responses which provided a partial new explanation, and a negative market reaction to responses which provided a detailed new explanation following a pre-query price run-up.

There was also a negative market reaction to responses which provided a detailed new explanation following a price run-down, but there was no significant market reaction to responses which provided a partial new explanation following a pre-query price run-down.

As a comparison, we also examined price queries by the Stock Exchange of Hong Kong (SEHK). Over the same period from 2009 to 2012, there were 681 price queries by SEHK, substantially more than that for SGX. Similar to SGX, there were substantially more queries for unusual price increases compared to unusual price decreases, with 77 per cent of all price queries relating to unusual price increases.

We found that the market reactions to price queries in Hong Kong were quite different from Singapore. A response with no new explanation resulted in a reversal in stock price following a pre-query price run-down. This suggests that investors in Hong Kong generally trusted the issuer when it stated that it had no new explanation for the unusual price movement. There was also a continuation of the stock price after a response of detailed or partial new explanation following a pre-query price run-up and run-down, which implies useful information content in the responses.

Therefore, the query system in Hong Kong seems to perform comparatively better than in Singapore. The accompanying table summarises the market reactions to the different responses to price queries in Singapore and Hong Kong.

 

Summary of the Market Reactions for Responses to Price Queries in Singapore and Hong Kong

Pre-Query Price Movement

Market Reactions for Different Responses

No New Explanation

Partial New Explanation

Detailed New Explanation
Run-Up (Singapore)

No Reaction

Positive

Negative
Run-Up (Hong Kong)

No Reaction

Positive

Positive
Run-Down (Singapore)

No Reaction

No Reaction

Negative
Run-Down (Hong Kong)

Positive

Negative

Negative

 

Complementary roles

Surveillance and enforcement have to work hand in hand in order to ensure effective regulation. A review of the query system, which acts as a surveillance mechanism, in Singapore and Hong Kong shows that they are largely similar.

A possible reason why the query system in Hong Kong appears to be more effective is that Hong Kong has a stricter enforcement regime. For example, Hong Kong has an independent Listing (Disciplinary Review) Committee which deals with disciplinary matters.

Another study we have recently completed (Ho Yew Kee, Mak Yuen Teen and Gladys Lee) found that between 1999 and 2012, the SEHK issued a total of 174 public reprimands in the form of censures and criticisms against issuers and/or directors. More than one-third of these sanctions were for failure to make timely, accurate or complete disclosure of material price-sensitive information. Therefore, issuers that hide information when queried can be disciplined by the committee. This may explain why no new information in the responses for Hong Kong-listed companies is a credible signal.

In contrast, disciplinary matters relating to the breach of listing rules by listed issuers are currently dealt with internally by SGX. In addition, SGX has used public reprimands very sparingly compared to the SEHK. In this regard, the recent decision by the MAS and SGX to establish an independent Listings Disciplinary Committee and an independent Listings Appeals Committee, together with the introduction of a wider range of sanctions for breaches of listing rules, are steps in the right direction to improve the effectiveness of enforcement actions by SGX. This can, in turn, improve the effectiveness of the query system used by SGX to improve transparency in our securities market.

The writers are respectively associate professor, professor, and first class BBA (Accountancy) honours graduate from the Department of Accounting at the NUS Business School. This article is based on Eugene Kwek’s research for his honours thesis under the supervision of the first two writers