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Impact of disclosure of risk factors on the initial returns of initial public offerings (IPOs)

Shaista Wasiuzzaman (Faculty of Management, Multimedia University, Cyberjaya, Malaysia)
Fook Lye Kevin Yong (Graduate School of Management, Multimedia University, Cyberjaya, Malaysia)
Sheela Devi D. Sundarasen (Accounting Department, College of Business Administration, Prince Sultan University, Riyadh, Saudi Arabia)
Noor Shahaliza Othman (Faculty of Management, Multimedia University, Cyberjaya, Malaysia)

Accounting Research Journal

ISSN: 1030-9616

Article publication date: 8 May 2018

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Abstract

Purpose

When a firm goes public for the first time, its prospectus serves as an important reference for investors. It is required by regulation that the risk factors which have significant influence on the business be disclosed in the prospectus. The purpose of this study is to analyze how disclosure of these risk factors influences the initial returns of initial public offerings (IPOs).

Design/methodology/approach

To do this, a sample of 96 Malaysian new equity offerings (IPOs) from year 2009 to year 2013 is used. Ordinary least squares regression technique is used to regress initial returns against risk disclosures. Aside from overall risk disclosure, individual dimensions of risk (internal risk, external risk and investment risk) are also considered.

Findings

Results of the regression analyses reveal a direct relationship between the IPO initial returns and the disclosure of risk. Overall risk disclosure is found to be highly significant in influencing initial returns. However, further investigation into the individual group of risks shows that only investment risk is highly significant in influencing IPO initial returns.

Originality/value

The results found in this study are interesting as, unlike prior studies, it is shown that disclosures of internal and external risks are not significant in influencing investors’ actions possibly because of their generalizability, whereas disclosures related to investment risks are significant. Equity of firms which disclose more of its risk factors can be expected to generate higher initial returns.

Keywords

Acknowledgements

The authors wish to acknowledge the feedback and contributions from the participants of the ICABEC2016 which helped to significantly improve this paper.

Citation

Wasiuzzaman, S., Yong, F.L.K., Sundarasen, S.D.D. and Othman, N.S. (2018), "Impact of disclosure of risk factors on the initial returns of initial public offerings (IPOs)", Accounting Research Journal, Vol. 31 No. 1, pp. 46-62. https://doi.org/10.1108/ARJ-09-2016-0122

Publisher

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Emerald Publishing Limited

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