Cheap IPO: Does it matter?

Abstract

It can be argued that a cheaply priced IPO would attract more potential buyers, especially small or retail investors as they are commonly known in Malaysia, which could result in more speculative trading activities due to its “cheap” perception. A fixed-price IPO serves a unique situation in which the price of an IPO is fixed prior to its offering to potential buyers, and it gives the opportunity to test whether or not a cheaply priced IPO can attract more potential buyers which can result in more speculative trading activities, hence higher initial return and price spread. This study examines a sample of 104 Malaysian fixed-price IPOs from January 2009 to December 2014, where I test the relationship between cheaply priced IPOs and their initial returns and also their price spreads during the first day of trading. I hypothesize that a cheaply priced IPO will attract more potential investors (especially the small or retail investors) that will result in a more speculative trading activity that will later push the IPO price higher in the secondary market. A speculative trading activity will also result in a higher price spread, which refers to the difference between the highest and the lowest price. The same situation occurs with regard to trading board, where investors (especially retail investors) are usually more attracted to cheaply priced IPOs, which are associated with IPOs listed on the ACE Market of Bursa Malaysia which caters for small, young and technology companies. As noted by Lowry et al. (2010), IPOs of small, young and technology firms are more difficult to value due to higher information asymmetry between the issuer and the investors, and thus we would expect higher price spread in these IPOs. In general, the results show that IPOs with low offer price and IPOs listed on the ACE Market have higher initial returns and higher price spreads compared to IPOs with high offer price and IPOs listed on the Main Market. The result of this study implies that investors can benefit significantly from investing in IPOs with low offer price. Investors can also benefit from investing in IPOs listed on the ACE Market, which is associated with low-priced IPOs. The implication to the regulatory bodies of Bursa Malaysia is that they should pay closer attention to IPOs with low offer price, and IPOs listed on the ACE Market because these IPOs are subject to speculative trading activities.