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Relationship between prestige signals and over-subscription ratio: Evidence from Malaysian initial public offerings

Ali Albada (Graduate School of Business, Universiti Kebangsaan Malaysia, Bangi, Malaysia)
Othman Yong (Graduate School of Business, Universiti Kebangsaan Malaysia, Bangi, Malaysia)
Soo-Wah Low (Graduate School of Business, Universiti Kebangsaan Malaysia, Bangi, Malaysia)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 12 April 2019

Issue publication date: 31 July 2019

Abstract

Purpose

The purpose of this paper is to examine whether initial public offering (IPO) over-subscription is a function of firm’s prestige signals conveyed by third parties with reputational capital such as underwriter, auditor and independent non-executive board member.

Design/methodology/approach

The relationship between prestige signals and over-subscription ratio (OSR) of IPOs is analysed using a cross-sectional regression based on a sample of 393 IPOs issued between January 2000 and December 2015.

Findings

The results indicate that IPOs underwritten by reputable underwriters have lower OSR than those underwritten by non-reputable underwriters. While issuer engages reputable underwriter to certify firm quality to reduce information asymmetry, the action brings with it lower initial returns for its IPO. Investors interpret the signal conveyed by issuer’s choice of underwriter from under-pricing perspective and respond accordingly by reducing IPO demand. This implies that investors regard under-pricing as a more valuable signal than firm quality signal associated with underwriter reputation. The findings also indicate that over-subscription increases in IPOs that have above average initial returns and higher institutional participation. Issuing firms that go public in a period of high IPO volume are associated with low OSR.

Originality/value

This is the first paper to examine the relationship between the prestige signals and OSR of IPOs in the Malaysian context.

Keywords

Citation

Albada, A., Yong, O. and Low, S.-W. (2019), "Relationship between prestige signals and over-subscription ratio: Evidence from Malaysian initial public offerings", International Journal of Managerial Finance, Vol. 15 No. 4, pp. 564-579. https://doi.org/10.1108/IJMF-02-2018-0067

Publisher

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Emerald Publishing Limited

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