Abstract
The Capital Market Supervisory Agency in Indonesia and subsequently, the Indonesian Stock Exchange introduced the requirement of appointing at least 30% commissioners as independent, in the Board of Commissioners, in all public companies by December 31, 2001. The present study documents the extent of compliance of this new requirement and investigates whether the capital market can recognize the IPO firms that are in compliance from those that are not, using a sample of 72 IPO firms in Indonesia over the period 2002 through 2007. Results from the multivariate analysis indicate that IPO firms that are in compliance do experience significant less underpricing compared to those that are not. Furthermore, a positive, but insignificant, relationship between compliance and post- IPO firm valuation is reported in the present study. The results documented in this study should be comforting to the policy makers in Indonesia, as well as other developing countries, in that governance reform measures do work without necessarily having a pre-existing strong legal system.
Highlights
The market-based corporate governance model postulates that good corporate governance helps companies to increase share price and makes it easier to obtain external capital
The present study documents the extent of compliance of this new requirement for companies to have at least 30% of Board of Commissioners (BOC) members as independent and investigates whether the capital market can recognize the IPO firms that are in compliance from those that are not, using a sample of 72 IPO firms in Indonesia over the period 2002 through 2007
Results from the multivariate analysis indicate that IPO firms that are in compliance do experience significant less underpricing compared to those that are not
Summary
The market-based corporate governance model postulates that good corporate governance helps companies to increase share price and makes it easier to obtain external capital. To capture the impact of complying with the requirement of having at least 30% Independent Commissioners in the BOC on IPO underpricing, if any, a multivariate model is estimated as follows: UP = α0 + β1 CLVL + β2 AGE + β3 IOP + β4 LSIZE + β5 PCTPUB + Β6 AUDREP + ε (2)
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