Shariah-compliant status and IPO oversubscriptions

Abstract

PurposeThe purpose of this paper is to examine the impact of Shariah-compliant status on oversubscription of initial public offerings (IPOs) in Malaysia. It is believed that the Shariah-compliant status serves as a platform that sends a credible signal to investors which could possibly explain the IPO oversubscription anomaly.Design/methodology/approachThis study used a multivariate and quantile regression model which involved 252 IPOs listed on Bursa Malaysia from 2005 to 2015.FindingsThe results show a significant positive relationship between Shariah-compliant status and oversubscription ratio, which suggests that companies with Shariah status could draw the attention of the investors. Strict guidelines and permissible elements of Shariah-compliant are considered agreeable and amicable by the investors.Research limitations/implicationsFuture studies should look into financial ratio benchmark (cash and debt) for determining Shariah-compliant status to enhance the understanding of oversubscription of IPOs in Malaysia.Practical implicationsThis study offers practical understanding to the issuers and underwriters on the factors that should be considered in assuring a good early performance of their issuance. Therefore, it will benefit the issuers and underwriters in managing and planning the IPO process carefully.Social implicationsThe results of this study provide a new insight for investors regarding important information found in the prospectus when making the decisions to subscribe to IPOs.Originality/valueThis paper is one of the first to provide an empirical evidence of the impact of Shariah-compliant status on oversubscription in the IPO market.