Abstract
<p><span>This study attempts to analyze fluctuation of IPO underpricing in Indonesia market from 1990-2010. This research test three proposed hypotheses: changing risk composition, changing incentives alignment, and changing issuers’ objective function. The researcher also add other variables as potential explanation for underpricing fluctuation: introduction of book building mechanism in year 2000, industry (finance and non-finance), market return, and privatization (IPO of state owned companies and non-state owned companies). The analysis shows that market return and the introduction of book building mechanism have positive impact on underpricing. However, when both variables in regression equation are included, the effect of market return disappears, while the effect of book building mechanism persists. This finding seems to support Book Building advantage arguments and changing issuers’ objective functions hypothesis, in the sense that the introduction of book building mechanism changes objective function of parties involved. Final result is a change in IPO under pricing.</span></p>
Highlights
Initial public offering (IPO) is an important means of financing for companies around the world
We find that IPO pricing methods are the strongest variable in explaining IPO fluctuation overtime in Indonesia market
Hypothesis Development Following Loughran and Ritter (2004), I attempt to test three non-mutually exclusive competing hypotheses to explain fluctuation of IPO underpricing in Indonesia market: the changing risk composition hypothesis, the realignment of incentives hypothesis, and the changing issuer objective function hypothesis
Summary
Initial public offering (IPO) is an important means of financing for companies around the world. We find that IPO pricing methods (book building versus fixed price methods) are the strongest variable in explaining IPO fluctuation overtime in Indonesia market. Market return and underwriters’ reputation are second strongest variables in explaining IPO underpricing This finding does not seem to support asymmetric information, changing of risk composition, and realignment of incentive hypotheses. I attempt to test three non-mutually exclusive competing hypotheses to explain fluctuation of IPO underpricing in Indonesia market: the changing risk composition hypothesis, the realignment of incentives hypothesis, and the changing issuer objective function hypothesis. Corruption hypothesis may change issuers’ objective function Under this explanation, decision makers of issuing firms are willing to accept IPO underpricing, since they can profit from IPO underpricing. Changes in the regulation may affect objective functions of parties related to IPO; issuers’ objective function which gets affected by changes in the regulation
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