Initial returns of Malaysian IPOs and Shari'a‐compliant status

Abstract

PurposeThe 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/approachThe 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.FindingsThe 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/implicationsFuture 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/valueThis paper is one of the first to examine the effect of shari'a‐compliant status on the performance of IPOs.