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21 – 30 of over 81000Shaista Wasiuzzaman, Fook Lye Kevin Yong, Sheela Devi D. Sundarasen and Noor Shahaliza Othman
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…
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.
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Chui Zi Ong, Rasidah Mohd-Rashid and Kamarun Nisham Taufil-Mohd
This study aims to investigate the valuation accuracy of Malaysian initial public offerings (IPOs) by using price-multiple methods.
Abstract
Purpose
This study aims to investigate the valuation accuracy of Malaysian initial public offerings (IPOs) by using price-multiple methods.
Design/methodology/approach
Cross-sectional data including 467 IPOs listed on the Malaysian stock exchange were used for the period of 2000–2017. This study used univariate ordinary least square (OLS) regression to analyse the relationship between IPOs’ price-multiples and comparable firms’ price-multiples. The test of valuation accuracy was conducted via computing valuation errors by segregating the sample into two groups: fixed-price IPOs and book-built IPOs. Furthermore, multiple OLS regression was used to examine the influence of IPO valuation on underpricing.
Findings
The findings of the results suggested that IPOs price-to-earnings (P/E), price-to-book (P/B) and price-to-sales (P/S) multiples were positively related to the median P/E, P/B and P/S multiples of five comparable firms matched by industry and revenues. The P/S multiple was shown to be the most significant valuation method, specifically in book-built IPOs. The findings indicated that those firms that had a lower valuation in comparison to the comparable firms were inclined to underprice their IPOs to allure investors to subscribe IPOs. In addition, book-built IPOs that had fair valuations were inclined to generate higher initial returns for investors.
Practical implications
The findings of this study observed implications for underwriters in avoiding the mis-valuation issue by considering the book-building mechanism.
Originality/value
This study attempted to explore the suitability of the valuation method to value IPOs in Malaysia.
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Bazeet Olayemi Badru and Nurwati A. Ahmad-Zaluki
The purpose of this paper is to investigate whether proxies considered under ex ante uncertainty hold true under a fixed price mechanism structure. In particular, the study…
Abstract
Purpose
The purpose of this paper is to investigate whether proxies considered under ex ante uncertainty hold true under a fixed price mechanism structure. In particular, the study examines whether pre-initial public offering (IPO) financial performance, measured by Altman Z-score, can serve as a proxy for ex ante uncertainty or signalling in an IPO market where a fixed price mechanism is used to determine the offer price.
Design/methodology/approach
This study uses solely ex ante information available to prospective investors prior to the IPO to proxy for ex ante variables. It also applies a more sophisticated and robust approach using quantile regression (QR) technique in addition to ordinary least squares (OLS) regression. Applying the QR technique allows the study to produce estimates for the conditional quantiles of the distribution of IPO initial returns and address the violations of basic assumptions of the standard OLS technique.
Findings
The results show that for ex ante variables, such as IPORISK, company size, the Altman Z-score measure of pre-IPO performance, audit quality and the technology industry, are significantly related to IPO initial returns. However, the relationship differs across the conditional quantiles of the distribution of IPO initial returns, which would not have been recognised using standard OLS. However, the sign of the coefficients shown by some of these variables contradicts the ex ante uncertainty hypothesis assumption, but they are found to have predictive power in explaining IPO initial returns. These findings reveal unique characteristics of the IPO process and investors in Malaysia. Most importantly, the Altman Z-score is found to be significant in the lower and upper quantiles, but insignificant around the median quantile, which implies that Altman Z-score is important for IPOs with low and high initial returns.
Research limitations/implications
These findings suggest that theoretical explanations of the ex ante uncertainty hypothesis cannot be generalised across financial markets, particularly in the Malaysian IPO market where fixed price offerings are common, and investors are risk averse, whereby they avoid risky IPOs, and prefer to take a small amount of returns against high risks. In addition, the composition of the companies in the market is not as large as the developed markets. This implies that the share price of the IPO may be sensitive to other disclosures in the prospectus, market sentiments or financial news. This study recommends the need for more empirical evidence for this purpose by including other important proxies of ex ante uncertainty, such as the use of IPO proceeds and risk factors that are disclosed in the prospectus to test whether the ex ante uncertainty hypothesis holds true in Malaysia.
Originality/value
This study fulfils the need for finding an appropriate theory that better explains IPO initial returns in the Asian IPO market by focussing exclusively on the pre-IPO information available in the prospectus. It also sheds light on important selected pre-listing information.
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Ruzita Abdul Rahim and Othman Yong
The purpose of this paper is to investigate the initial return patterns of Malaysian initial public offerings (IPOs) and whether shari'a‐compliant status would alter such patterns.
Abstract
Purpose
The purpose of this paper is to investigate the initial return patterns of Malaysian initial public offerings (IPOs) and whether shari'a‐compliant status would alter such patterns.
Design/methodology/approach
The effect of shari'a‐compliant status on the patterns of initial return of IPOs is analyzed using a sample of 386 IPOs issued between January 1999 and December 2007.
Findings
The preliminary results indicate that over the study period, the initial returns of Malaysian IPOs drop substantially from 94.91 percent reported from the pre‐crisis period of 1990‐1998 to 31.99 percent, a level more comparable to that reported in advanced markets. Since the initial returns do not revert to pre‐crisis levels, the new low IPO underpricing trend is more likely to be associated with the removal of pricing restraints. The results of regression analyses on the full sample, however, suggest that there is no drastic change with respect to factors that drive initial returns in Malaysian IPOs. With regards to shari'a‐compliant status, IPOs of this subsample show similar profiles to those of non‐shari'a counterparts. However, other than demand, the two subsamples are driven by different factors. Initial returns of shari'a‐compliant IPOs are driven by the size and type of offers, whereas those of the non‐shari'a IPOs are driven by risks.
Research limitations/implications
Future studies should re‐examine the issue by taking into consideration the extensiveness of a firm's compliance to shari'a rules and other predictor variables.
Originality/value
This paper is one of the first to examine the effect of shari'a‐compliant status on the performance of IPOs.
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Haoyu Gao, Ruixiang Jiang, Wei Liu, Junbo Wang and Chunchi Wu
Using initial public offering (IPO) involuntary delisting data, this chapter examines whether and how motivated institutional investors affect the survivability of IPO firms. The…
Abstract
Using initial public offering (IPO) involuntary delisting data, this chapter examines whether and how motivated institutional investors affect the survivability of IPO firms. The empirical evidence shows that the likelihood of future delisting is much lower for IPOs with more motivated institutional investors. This impact is more pronounced for firms with higher information asymmetry. The motivated institutional investors also facilitate better post-IPO operating performance. The results are consistent with the prediction of the limited attention theory.
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Travis L. Jones and Mushfiq us Swaleheen
The purpose of this paper is to examine the relationship between underwriter reputation and initial public offerings (IPOs) initial returns over a 24‐year period, from 1980 to…
Abstract
Purpose
The purpose of this paper is to examine the relationship between underwriter reputation and initial public offerings (IPOs) initial returns over a 24‐year period, from 1980 to 2003.
Design/methodology/approach
Two‐stage least‐squares regression analysis on data from IPOs offered from 1980 to 2003 is used to determine how the choice of IPO underwriter is related to initial returns when considering reputation as an endogenous variable.
Findings
This study shows, consistent with prior literature, that underwriter reputation is statistically significantly negatively related to initial returns from 1980 to 1991 and statistically significantly positively related to initial returns from 1992 to 2003, when reputation is taken as an exogenous variable. When considering the choice of the reputation of underwriter as endogenous to characteristics of the firm, the reputation of an underwriter is significantly positively related to IPO initial returns for 1980 to 2003 and 1992 to 2003 and insignificantly related, for 1980 to 1991.
Originality/value
This study adds value to finance literature in that it extends the research on the relationship between IPO initial returns and underwriter reputation. It also furthers the existing research on IPO anomalies and notes characteristics in this field of financial markets that may be important to both issuers and investment banks.
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Ehsan H. Feroz, Jarrod Johnston, Jacqueline L. Reck and Earl R. Wilson
The purpose of this paper is to describe a study which examined the effects of underwriter reputation market segments on the value relevance of firm specific risk measures in the…
Abstract
Purpose
The purpose of this paper is to describe a study which examined the effects of underwriter reputation market segments on the value relevance of firm specific risk measures in the pricing of initial public offerings (IPOs).
Design/methodology/approach
The study abandons the notion of a homogenous market for IPOs and focuses instead on the differential demand for information across identifiable segments of the IPO market in the pre‐market offering period leading to the first day trading closing prices. Ordinary least square (OLS) regressions were used to test the two hypotheses developed in the paper.
Findings
It was found that firm‐specific risk measures are associated with the initial trading day returns of IPOs managed by low reputation underwriters, but not those by high reputation underwriters. However, as expected, these risk measures are impounded in initial trading day returns only for a sub‐sample of high‐risk junk IPOs that were marked down in price by the underwriter prior to the offering in order to make them more attractive to investors.
Research limitations
As with all empirical studies the tests are joint tests of the hypotheses stipulated and econometric assumptions underlying OLS. The findings of the study may not be generalized to an unrelated domain.
Practical implications
The findings suggest that ex ante risk measures are useful in picking among junk IPOs those with the best chances of survival, and thus earning an initial trading return on those IPOs.
Originality/value
This is the first study to look at junk IPOs in a systematic manner using a quasi‐experimental design.
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Nino Martin Paulus, Marina Koelbl and Wolfgang Schaefers
Although many theories aim to explain initial public offering (IPO) underpricing, initial-day returns of US Real Estate Investment Trust (REIT) IPOs remain a “puzzle”. The…
Abstract
Purpose
Although many theories aim to explain initial public offering (IPO) underpricing, initial-day returns of US Real Estate Investment Trust (REIT) IPOs remain a “puzzle”. The literature on REIT IPOs has focused on indirect quantitative proxies for information asymmetries between REITs and investors to determine IPO underpricing. This study, however, proposes textual analysis to exploit the qualitative information, revealed through one of the most important documents during the IPO process – Form S-11 – as a direct measure of information asymmetries.
Design/methodology/approach
This study determines the level of uncertain language in the prospectus, as well as its similarity to recently filed registration statements, to assess whether textual features can solve the underpricing puzzle. It assumes that uncertain language makes it more difficult for potential investors to price the issue and thus increases underpricing. Furthermore, it is hypothesized that a higher similarity to previous filings indicates that the prospectus provides little useful information and thus does not resolve existing information asymmetries, leading to increased underpricing.
Findings
Contrary to expectations, this research does not find a statistically significant association between uncertain language in Form S-11 and initial-day returns. This result is interpreted as suggesting that uncertain language in the prospectus does not reflect the issuer's expectations about the company's future prospects, but rather is necessary because of forecasting difficulties and litigation risk. Analyzing disclosure similarity instead, this study finds a statistically and economically significant impact of qualitative information on initial-day returns. Thus, REIT managers may reduce underpricing by voluntarily providing more information to potential investors in Form S-11.
Practical implications
The results demonstrate that textual analysis can in fact help to explain underpricing of US REIT IPOs, as qualitative information in Forms S-11 decreases information asymmetries between US REIT managers and investors, thus reducing underpricing. Consequently, REIT managers are incentivized to provide as much information as possible to reduce underpricing, while investors could use textual analysis to identify offerings that promise the highest returns.
Originality/value
This is the first study which applies textual analysis to corporate disclosures of US REITs in order to explain IPO underpricing.
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The purpose of this paper is to investigate returns of initial public offerings (IPOs) in an emerging market and differences in the returns of privatized and non‐privatized…
Abstract
Purpose
The purpose of this paper is to investigate returns of initial public offerings (IPOs) in an emerging market and differences in the returns of privatized and non‐privatized offerings.
Design/methodology/approach
Market‐adjusted return is computed as daily cumulative excess returns for six‐ and 12‐month periods. Long‐run performance is measured by calculating market‐adjusted buy and hold return assuming that shareholders pursue strategies of 1, 2 and 3 years.
Findings
The paper finds that underpricing exists even in emerging markets and at a higher level than in developed countries. Average returns are over 55 per cent and is comparable with that of Malaysia, Mexico, Poland and Thailand. POs generally outperform the market, with the privatized IPOs offering superior excess returns than the non‐privatized IPOs. Excess returns diminish by the end of three years. The pattern of the returns seen in this case is different to similar studies elsewhere, where excess returns are observed over four to five years after the initial listing.
Research limitations/implications
The number of IPOs investigated here is comparatively small. However, because the sample consists of a mix of privatized vs non‐privatized companies, the results provide useful insights on factors that may drive the unusual returns. While underpricing is common in most IPOs, the state when privatizing enterprises seem to be offering investors excessive returns.
Originality/value
This paper provides researchers and policymakers some insights into the workings of capital markets in emerging economies.
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Priya Mandiratta and G.S. Bhalla
The present study aims to examine the short-term effect of disinvestment oriented IPOs and FPOs on the stock market performance of Indian central public sector enterprises…
Abstract
Purpose
The present study aims to examine the short-term effect of disinvestment oriented IPOs and FPOs on the stock market performance of Indian central public sector enterprises (CPSEs), which divested their equity between 2000 and 2017.
Design/methodology/approach
The analysis of stock price reaction is conducted for listing dates only in the case of IPOs and three different dates in the case of FPOs through the event study methodology. The three-event dates related to FPOs are public notification date (PND), issue announcement date (IAD) and price band date (PBD).
Findings
Overall empirical analysis indicates that investor sentiments are generally insignificant prior to and posts the PND (first date). The second major date of announcement that is (IAD) is new information in the market and returns are found to be significantly negative across both the periods that is before and after IAD. Thus, the analysis depicts strongly negative investor sentiments in the case of IAD. These results are further substantiated by negatively significant CAR (cumulative abnormal returns) values for both the pre and post-event windows of PBD as well.
Research limitations/implications
Empirical analysis concludes that investors do not stand a chance to gain abnormal returns through initiating positions in the stocks of CPSEs during the alternative event dates analyzed.
Originality/value
Since the year 2000, disinvestment through public offering has gathered momentum, and this mode accounts for approximately 62% of the collective disinvestment funds generated by the government of India till now. But there have been very limited research studies on the market performance of disinvested CPSEs. This analysis provides new empirical evidence for the market reactions of retail investors in response to the sale of equity by the Indian government in CPSEs.
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