Abstract
The pricing of IPOs is a challenging task among underwriters as they require resources from firms. Contrary to the non-financial information presented in a prospectus to set an offer rice, pre-IPO accounting information could arguably influence IPO offer price. This study aims to investigate the relationship between leverage and IPO offer price. A crosssectional Ordinary Least Square (OLS) regression was implemented to investigate the relationship between leverage and offer price based on a sample of 129 Malaysian IPOs issued between January 2009 and December 2018. As a result, it was proven that leverage was negatively related to offer prices. Accordingly, it was proposed in the findings that fit, which issued higher leverages prior to IPO listing, often posed high financial risks. Subsequently, underwriters and issuers set a lower price for IPOs to compensate for a higher degree of information asymmetry among retail investors. Among the implications of this study’s findings include investor concerns on accounting information, especially leverage upon determining IPO value and IPO investment.
Highlights
Art or science is the possible pricing of IPOs
As the majority of Malaysian IPO prices are determined through fixed-price mechanism which displays higher information asymmetries (Yong, 2015), this study provides further insights on the investigation regarding the degree of the pre-IPO leverage influence on IPO offer price after other related factors are controlled
The concerns of issuers and underwriters about accounting variable based on pro-forma financial statements in IPO prospectuses might influence offer prices compared to non-financial information
Summary
Art or science is the possible pricing of IPOs. From the aspect of science, it involves the use of a quantitative model to determine the approximate worth of organisations. In terms of the art aspect, underwriters determine offer prices by assessing the market conditions of IPOs and identifying the potential demand for IPO shares. Malaysia, the majority of IPOs are issued through a fixedprice mechanism (Tajuddin, Mohd-Rashid, Abdullah, & Abdul-Rahim, 2015). In this case, underwriters and issuers set the offer price of IPOs without taking the demands of potential investors into account. Underwriters and issuers set the offer price of IPOs without taking the demands of potential investors into account In this case, potential investors would face challenges in determining the firms’ values as they are informed asymmetrically. The IPO pricing should reflect its intrinsic value to encourage aftermarket buying and ensure a steady increase in price
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