Intended use of IPO proceeds and initial returns

Abstract

Purpose

This study aims to investigate the effects of the intended use of initial public offerings (IPO) proceeds that is disclosed in the prospectus on IPO initial returns.

Design/methodology/approach

A sample of IPOs listed on Bursa Malaysia from 2005 to 2015 is used. The intended use of IPO proceeds is categorised into three uses, namely, growth opportunities, debt repayment and working capital. In addition to ordinary least squares regression, the study applies a more sophisticated and robust approach using the quantile regression technique.

Findings

The results show that the intended use of IPO proceeds for growth opportunities and working capital is positively associated with IPO initial returns, whereas debt repayment is negatively associated with IPO initial returns. When the intended use of IPO proceeds for growth opportunities is further expanded into capital expenditure (CAPEX) and research and development (R&D), the intended use of IPO proceeds for CAPEX is positively associated with IPO initial returns, whereas R&D is negatively associated with IPO initial returns.

Research limitations/implications

These findings suggest that intended use of IPO proceeds provides useful information about IPO initial returns and investors can use this information as guidance to make informed decisions. In addition, regulatory authorities should pay close attention to the amount allocated to each intended use of IPO proceeds as this may play a critical role in the success of a company and the economy.

Originality/value

This study gives new empirical evidence on the desire and motivations of IPO and the usefulness of designated use of IPO proceeds disclosed in the prospectus in explaining IPO initial returns.

Citation

Ahmad-Zaluki, N.A. and Badru, B.O. (2021), "Intended use of IPO proceeds and initial returns", Journal of Financial Reporting and Accounting, Vol. 19 No. 2, pp. 184-210. https://doi.org/10.1108/JFRA-12-2019-0172