Malaysian Initial Public Offerings Research Articles

An insight into the signaling role of Sharia status: a case from an emerging IPO market

Purpose This study aims to examine the potential of Sharia status as ex ante information to signal the quality of an issuing firm by improving the decision-making process of potential investors when assessing initial public offerings (IPOs) in an environment where information asymmetry is pronounced. Potential investors face challenges in evaluating and determining the true value of IPO issues, which inherently influences their decision-making. Consequently, this results in pronounced price fluctuations in IPO shares, leading to higher underpricing. Design/methodology/approach This study uses a sample of 350 IPOs listed on the Kuala Lumpur Stock Exchange (KLSE) between 2004 and 2021 to examine the signaling role of Sharia-compliance status. A three-model approach is used to ensure that the study's objectives are met. The first model investigates the effect of Sharia status on underpricing to determine whether the main beneficiary of such a signal is the investor or the issuer. The second model examines the effect of Sharia status on investor demand to determine if such a signal influences prospective investors' investment decision-making processes. The third model inspects the effect of Sharia status on investor divergence of beliefs to measure the signal's ability to reduce information asymmetry within the Malaysian IPO market. Findings The Malaysian IPO market relies heavily on the fixed-price mechanism, which exacerbates high information asymmetry, affecting potential investors' behavior, asset price formation and return generation on the first day of listing. The study results indicate that Sharia status does not have any signaling role in the Malaysian IPO market. This is because investors in the Malaysian market are driven by ex ante information that helps unveil relevant information that leads to capital gains. Furthermore, most new issues in the Malaysian IPO market fall under Sharia status, diluting the relevance of such information for prospective investors in determining profitable investments. Practical implications The findings highlight the challenges faced by issuing firms in estimating market demand due to limited premarket insights and the difficulties prospective investors face in identifying the quality of issuing firms. Efforts to provide more information on investor demand can reduce uncertainty and facilitate more informed decision-making. Originality/value This research stands as one of the pioneering efforts to provide an empirical explanation of the potential signaling influence of Sharia status in an emerging IPO market.

DETERMINANTS OF THE LONG-TERM PERFORMANCE OF MALAYSIAN INITIAL PUBLIC OFFERINGS

This study examined the determinants of the long-term performance of 351 initial public offerings (IPOs) launched in Malaysia overthe 2002–2010 period. This paper used a panel regression analysis framework based on the ordinary least squares (OLS) technique toexamine the potential determinants of IPOs’ long-term performance. The findings revealed that the volatility of aftermarket returns, the dummy ACE market and concentration ownership significantly influence the long-term performance of Malaysian IPOs. This paperoffers important implications specifically for investors as the findings can help them understand more about public companies’ long-term performance and how to better predict their performance.

From disclosure to sustainable performance: how corporate social responsibility disclosure impacts the long-term share price performance of Malaysian IPO

PurposeThis paper examines the relationship between the extent and quality of the four dimensions of corporate social responsibility disclosure (CSRD) namely community, environment, workplace and marketplace with the long-run share price performance of Malaysian initial public offering (IPO) companies.Design/methodology/approachThis study utilised secondary data by the content analysis of the annual reports and Datastream of 115 IPOs listed from 2007 to 2015 in Malaysia. The IPO’s performance was determined by calculating the return measures under the equally weighted and value-weighted schemes of the mean abnormal returns and buy-and-hold abnormal returns covering the three years post-listing using the event-time approach.FindingsThe findings demonstrate that Malaysian IPOs experience substantial overperformance and underperformance when both the IPO performance measures are benchmarked against the matched companies and market. The results indicated that the extent and quality of the community and environment CSRD dimensions are positively and significantly correlated to the IPO’s performance. On the other hand, the extent and quality of the workplace and marketplace CSRD dimensions are negatively and significantly correlated to the IPO performance.Practical implicationsMalaysian regulators could benefit from these findings in their endeavour to carry out a reform process on CSRD to improve its quality. The results of this study are important to investors, regulators, non-government organisations, communities and policymakers. They also enhance the understanding of companies about the importance of disclosing greater CSR information to improve their performance and profitability.Originality/valueTo the researchers' best knowledge, this study provides new insights into the association between CSRD and the performance of Malaysian IPO companies, which is considered important.

Earnings forecast disclosures and oversubscription rates of fixed-price initial public offerings (IPOs): the case of Malaysia

PurposeThe main purpose of this study is to examine the disclosure of earnings forecasts in firms' prospectuses to explain investor demands or, in other words, oversubscription rates of Malaysian initial public offerings (IPOs).Design/methodology/approachOrdinary least squares and robust methods were used to examine cross-sectional data comprising 466 fixed-price IPOs reported for the period from January 2000 to February 2020 on Bursa Malaysia.FindingsThe results showed that IPOs with earnings forecasts obtained higher oversubscription rates than those without earnings forecasts. IPOs with earnings forecasts provide value-relevant signals to prospective investors about the good prospects of firms, resulting in an increase in the demand for IPO shares. For the IPO samples listed during the global financial crisis (GFC) period, IPOs with earnings forecasts had negative impacts on the oversubscription rates. These results were robust to quantile methods and the two-stage least squares method.Research limitations/implicationsThe research findings provide fresh information for investors regarding the importance of earnings forecasts as a trustworthy signal of a firm’s quality when making share subscription decisions.Practical implicationsThe regulator is advised to encourage issuers to include earnings forecasts in their prospectuses since such forecasts help to increase the demand for IPOs.Originality/valueThis study contributes to the literature by offering empirical evidence regarding the signalling impact of earnings forecast disclosures on investor demands for Malaysian IPOs. Moreover, this study provides evidence demonstrating the impact of earnings forecast disclosures on oversubscription rates of Malaysian IPOs during the GFC period.

Community and environment disclosures and IPO long-run share price performance

Purpose This paper aims to examine the relationship between the community and environment disclosures and the long-run share price performance of Malaysian initial public offering (IPO) companies. Design/methodology/approach This study used secondary data through the content analysis of the annual reports and DataStream of 115 sampled IPOs listed on Bursa Malaysia from 2007 to 2015. The present study incorporated weighted least squares and quantile least squares to evaluate the relationship between the community and environment disclosures and IPO performance. Findings The results show a positive and significant relationship between the extent and quality of community disclosures and IPO performance; while the extent and quality of environment disclosures have a negative and positive relationship, respectively, with IPO performance. These results suggest that community and environmental activities can be considered an effort to enhance Malaysian IPOs. Practical implications These results suggest that Malaysian IPO companies should be involved consistently in corporate social responsibility disclosure, i.e. community and environmental activities, as they have a significant impact on the performance of Malaysian IPOs. The findings can facilitate financial institutions and regulatory agencies in driving companies to be more responsible regarding community and environmental disclosures. Originality/value To the best of the authors’ knowledge, this study provides new insights into the relationship between the community and environment disclosures and the performance of Malaysian IPO companies.

What Determines Flipping Behaviour in an Emerging Market?

This study explores the behaviour of initial public offerings (IPOs) investors in the immediate aftermarket. Specifically, this study investigates the role of investors’ heterogeneity of opinion and IPO initial return in determining their flipping activities in Malaysia. The results from the first model show that both IPO initial return and heterogeneity of opinion have a significant positive effect on flipping activities. Furthermore, the effect of heterogeneity of opinion is more pronounced than IPO initial return, which drives us to conclude that the former is the main explanatory variable of investors’ flipping activities in the immediate first-day aftermarket. The results of the second model show that most flipping activities happen when the price range is at its highest level in the secondary market. Finally, the study concludes that investors’ flipping activities in the Malaysian IPO market are driven by quick and riskless capital gains.

The impact of initial public offering (IPO) attributes, firm-level characteristics and ownership on Malaysian IPO firms’ earnings management

The paper investigates Malaysian Initial Public Offering (IPO) firms’ financial reporting behaviour from the specific perspective of their earnings management (EM) practices covering both real (REM) and accrual (AEM) techniques. It further examines the impact of unique IPO attributes, firm level characteristics and ownership structure on both EM practices contemporaneously. Using the established and commonly used EM models to measure both AEM and REM for IPO firms from 2002 to 2013, the results indicate that IPO firms engage in both EM strategies around the corporate event. It also shows that such strategies are not just opportunistically motivated but attributable to several unique IPO attributes, firm level characteristics and ownership variables. The paper adds to the existing body of knowledge on IPO in the specific emerging country context of Malaysia which evidence from prior studies are observably scant.

Sustainability reporting and corporate reputation of Malaysian IPO companies.

The aim of this paper is to explore the relationship between sustainability reporting (SR) and corporate reputation (CR) in the context of initial public offering (IPO) companies in the developing market of Malaysia. This study utilises secondary data from 2007 to 2017 derived from the content analysis of the annual reports and Datastream of 139 sampled IPO companies listed on Bursa Malaysia. The study also employs ordinary least squares (OLS) regression. The result shows that CR has a positive association with SR quantity and quality and its dimensions, i.e., society, environmental, employee, and product. This result suggests that IPO companies can use SR practices to improve their CR. Most companies give little attention to SR issues. More research should be conducted to examine the SR by IPO companies due to the significant role that SR plays in improving the CR of Malaysian IPO companies. The findings can be used by financial institutions and regulatory bodies to encourage companies to be more responsible on SR issues. Businesses should incorporate social practices into their SR decisions. This paper underlines the importance of integrating social and organisational activities.

Level of sustainability reporting of Malaysian IPO companies.

This paper aims to determine the level of sustainability reporting (SR) among Malaysian initial public offering (IPO) companies. Due to a lack of awareness about SR and its dimensions, these aspects have not been receiving the necessary push from the public domain. This study is exploratory in nature. Secondary data were used by conducting content analysis of the annual reports of 139 sampled IPO companies listed on Bursa Malaysia from 2007 to 2017. Data were analysed using descriptive statistics, with extent and quality being used as measures of SR. The results demonstrated gradual improvements of the extent and quality of SR among Malaysian IPO companies. The overall extent of SR was 20.70%, with employee disclosure scoring the highest (34.87%), followed by society disclosure (32.77%), environmental disclosure (22.48%), and finally product disclosure (9.88%). The overall quality of SR was 32.04%, with society disclosure scoring the highest (36.09%), followed by employee disclosure (34.13%), environmental disclosure (20.28%), and finally product disclosure (9.50%). SR dimensions, namely society, environmental, employee, and product received little interest from most of the IPO companies. This study proposes that additional studies can be conducted to investigate SR among IPO companies.

Audit committee characteristics and the moderating effect of Malaysian code of corporate governance on IPO liquidity

PurposeThis study aims to investigate the link between audit committee characteristics and the liquidity of initial public offerings (IPOs) in Malaysia, which is an emerging economy in Southeast Asia. Another purpose of this study is to examine the moderating effect of the revised Malaysian code of corporate governance (MCCG) on the link between audit committee characteristics and IPO liquidity.Design/methodology/approachThe final sample consists of 304 Malaysian IPOs listed in 2002–2017. This study uses ordinary least squares regression method to analyse the data. To confirm this study’s findings, a hierarchical or four-stage regression analysis is used to compare the t-values of the main and moderate regression models.FindingsThe findings show that audit committee characteristics (size and director independence) have a positive and significant relationship with IPO liquidity. Also, the revised MCCG positively moderates the relationship between audit committee characteristics and IPO liquidity.Research limitations/implicationsThis study’s findings indicate that companies with higher audit committee independence have a more effective monitoring mechanism that mitigates information asymmetry, thus reducing adverse selection issues during share trading.Practical implicationsPolicymakers could use the results of this study in developing policies for IPO liquidity improvements. Additionally, the findings are useful for traders and investors in their investment decision-making. For companies, the findings highlight the crucial role of the audit committee as part of the control system that monitors corporate governance.Originality/valueTo the authors’ knowledge, this work is a pioneering study in the context of a developing country, specifically Malaysia that investigates the impact of audit committee characteristics on IPO liquidity. Previously, the link between corporate governance and IPO liquidity had not been investigated in Malaysia. This study also contributes to the IPO literature by providing empirical evidence regarding the moderating effect of the revised MCCG on the relationship between audit committee characteristics and IPO liquidity.

Does disclosure of earnings forecasts regulation affect the valuation of IPOs? Evidence from an emerging country

PurposeThis paper aimed to explore the effect of a regulatory change pertaining to earnings forecasts disclosure from a mandatory to a voluntary regime on the valuation of Malaysian initial public offerings (IPOs).Design/methodology/approachThe study employed ordinary least square (OLS) regression and quantile regression to analyse the impact of disclosure of earnings forecasts regulation on the valuation of IPOs which comprised 458 IPOs reported for the period 2000–2017 on Bursa Malaysia.FindingsThis paper revealed that the regulatory change in forecasted earnings disclosure from a mandatory to a voluntary regime, effective from 1 February 2008, had a negative impact on the valuation of IPOs. The regime change did not improve the transparency of firms issuing IPOs. In fact, the absence of forecasted earnings information in most IPO prospectuses caused ex ante uncertainties to increase. Voluntary disclosure, however, had a significant positive relationship with the valuation of the IPOs issued during the global financial crisis period (2008–2010). Firms concealed their poor qualities by excluding forecasted earnings information from their prospectuses in order to have a fair valuation.Practical implicationsThe findings may be used by policymakers as guidance in improving the existing regulation regarding the disclosure of forecasted earnings.Originality/valueThis paper provides new insight on the effect of a regulatory change pertaining to earnings forecasts disclosure from a mandatory to a voluntary regime on the valuation of Malaysian IPOs. It also provides evidence that the regulatory change of earnings forecast disclosure affects the IPOs' values listed during the global financial crisis period.

The impact of changes in regulations on Malaysian IPOs

PurposeThis study aims to examine the changes in equity guidelines and initial returns in the Malaysian initial public offering (IPO) market.Design/methodology/approachThe study uses cross-sectional data over 16 years from 2000 to 2016. It uses ordinary least squares for the baseline model and incorporates an interaction term, quantile regression, quadratic term, break test and logit regression model for further analysis.FindingsThe results support the propositions that lockup provisions signal commitment and demand increase initial returns. The revision in the Bumiputera equity requirement means that issuers no longer need to discount offer prices to entice investors. Finally, the revised Sharīʿah-compliance screening requirement ensures that stocks are better in quality and more transparent, leading to a higher demand that drives prices upwards.Research limitations/implicationsThis study’s findings provide insights into how issuers can secure good subscriptions. Besides, policymakers should ensure that firms disclose the required information in their prospectuses.Originality/valueThis study adds to the body of knowledge on whether and how the regulatory requirements affect IPO initial returns.

Predictive Role of Ex Ante Strategic Firm Characteristics for Sustainable Initial Public Offering (IPO) Survival

This study attempts to predict how long a newly listed corporation, usually termed initial public offering (IPO), will survive on the equity listing market. The three-fold contribution of this study comprises a hand-collected and substantially expanded dataset for listed IPOs (1990–2017) over a maximum tracking period of 31 years (1990–2020) to predict the IPO survival on emerging Malaysian capital market, the rationale and consequences for unifying the two listing boards (Main Board and Second Board) in 2009, and an investigation of the predictive role of ex ante strategic prospectus information as early warning signals for sustainable survival of Malaysian IPOs. We also make comparisons for the survival profile of IPOs listed on different listing equity boards. We use Cox proportional hazard (PH) model to estimate the empirical results because of the cohort research design of the study. Overall empirical results show that survival curves for IPOs listed on Main Board and Second Board were not statistically different. However, Second Board IPOs remained more vulnerable to hazard. The survival curves for IPOs listed on Main Market and ACE Market are statistically different. Empirical results reveal that high share premium, high listed capital, and longer firm age at listing date significantly increase the survival (reduce hazard) of IPOs listed on the Main Market and the Second Board. However, bigger firm size and elevated risk factors significantly reduce the survival (increase hazard) of the listed IPOs mentioned above. However, share premium is the only variable that has a negative and significant correlation with IPO survival on ACE Market. These results have implications for the regulators, prospective investors, and policymakers of emerging markets, where the IPO prospectus disclosures bridge the information asymmetry gap prevailing due to the nonexistence of public information prior to the IPO. Empirical findings of this study can be generalized to other developing and emerging markets where IPO prospectus substantially mitigates information asymmetry and ex ante strategic firm characteristics act as early warning signals in predicting IPO survival.

Managers’ Bait-and-Switch Tactics in the Malaysian Initial Public Offerings Market

Studies have shown that initial public offerings (IPOs) issuers’ intended use of IPO proceeds could provide insights into the motives for IPOs, however, whether or not issuers deviate from the stated use as disclosed in the prospectus remains unexplored. Therefore, this study used a sample of Malaysian IPO companies to investigate whether the actual use of IPO proceeds differs from the intended use of capital raised as stated in the prospectus. Based on the content analysis of IPO companies’ annual reports, 27 out of the 121 companies examined were unable to explain how the proceeds raised were applied. A total of 73 out of 121 companies exhibited changes in the intended use of capital raised, while 21 companies used the IPO proceeds exactly as intended. Noticeably, 20 out of the 73 companies sought for board approval for changes in the use of capital raised as stated in the prospectus. Therefore, there is indication that IPO issuers do change their intended use of IPO proceeds after listing on Bursa Malaysia. The implication of this is that the market may react to such changes and the post-IPO performance may be at stake. Therefore, future studies should examine how IPO companies’ performance is influenced by the intended and actual use of capital raised as this may help regulators and market participants to monitor its actual use.

IPO valuation using the price-multiple methods: evidence from Malaysia

PurposeThis study aims to investigate the valuation accuracy of Malaysian initial public offerings (IPOs) by using price-multiple methods.Design/methodology/approachCross-sectional data including 467 IPOs listed on the Malaysian stock exchange were used for the period of 2000–2017. This study used univariate ordinary least square (OLS) regression to analyse the relationship between IPOs’ price-multiples and comparable firms’ price-multiples. The test of valuation accuracy was conducted via computing valuation errors by segregating the sample into two groups: fixed-price IPOs and book-built IPOs. Furthermore, multiple OLS regression was used to examine the influence of IPO valuation on underpricing.FindingsThe findings of the results suggested that IPOs price-to-earnings (P/E), price-to-book (P/B) and price-to-sales (P/S) multiples were positively related to the median P/E, P/B and P/S multiples of five comparable firms matched by industry and revenues. The P/S multiple was shown to be the most significant valuation method, specifically in book-built IPOs. The findings indicated that those firms that had a lower valuation in comparison to the comparable firms were inclined to underprice their IPOs to allure investors to subscribe IPOs. In addition, book-built IPOs that had fair valuations were inclined to generate higher initial returns for investors.Practical implicationsThe findings of this study observed implications for underwriters in avoiding the mis-valuation issue by considering the book-building mechanism.Originality/valueThis study attempted to explore the suitability of the valuation method to value IPOs in Malaysia.

Underwriter reputation and IPO valuation in an emerging market: evidence from Malaysia

PurposeThe purpose of this study is to examine the influence of underwriter reputation on the valuation of Malaysian initial public offerings (IPOs).Design/methodology/approachThis study employed cross-sectional multiple regression models to analyse the relationship between underwriter reputation and IPO valuation that included 466 IPOs listed on Bursa Malaysia from 2000 to 2017.FindingsThe results revealed that underwriter reputation had a significant negative association with IPO valuation. Firms that engaged the services of reputable underwriters had their IPO offer prices set lower than the intrinsic values during the listing. After incorporating firms' size, this study found a positive relationship between underwriter reputation and IPO valuation. Big firms (high quality) hired reputable underwriters for certification purposes as issuers were aware that the cost of hiring a reputable underwriter would be justified by increased transparency after listing. Therefore, firms that engaged reputable underwriters had approximately fair values since issuers assumed that the price would be close to the intrinsic value following enhanced transparency post-listing.Research limitations/implicationsFuture studies should focus on other non-financial factors, such as auditor reputation.Originality/valueThe present study provides new insights into the certification role of underwriters in valuing IPOs in the Malaysian market.

Performance of initial public offerings (IPOs): the case of Shariah-compliant companies

Purpose The purpose of this paper is to examine the informational value of Shariah-compliant disclosure in the Malaysian initial public offerings (IPOs) prospectus and whether Shariah-compliant status has an impact on the IPO initial return when adopted as a signalling mechanism. Design/methodology/approach It uses data from 320 IPOs for Shariah-compliant companies listed on the Bursa Malaysia between 2004 and 2013. Findings It finds that the degree of IPO underpricing for Shariah-compliant companies is 19.97 per cent with investors earning significant returns on the first trading day. For the effect of different factors on the degree of IPO, we find that the size and type of IPO offers have a significant impact on the degree of IPO underpricing. Other economic confidence factor models fail to yield economically plausible parameter values. Originality/value The study contributes to the literature in a number of ways. It is the first to evaluate the effect of Shariah-compliance status regulation in Malaysian market, hence it provides an insight into the effectiveness of such regulation. Second, while the existing Shariah-compliant IPO studies in the same market focus on Shariah status at the date of the studies being conducted, this study uses the information around IPO time. The information that investors receive around IPO time may influence investors’ decision and valuation of the IPOs in the aftermarket. Specifically, this study is different from the previous research, as it investigates whether Shariah-compliant companies would change the average degree of IPO underpricing for companies listed on Bursa Malaysia.

Moderating Effect of Information Asymmetry on the Signalling Role of IPO Lockup Provision

This article examines the moderating effect of information asymmetry on the relationship between parameters of lockup provision and flipping activity of Malaysian initial public offerings (IPOs). While the main purpose of lockup provision is to promote commitment of major shareholders for the well-being of the IPO issuing companies at least throughout the lockup period, its role could also extend as a signalling device. Information asymmetry is prevalent in the context of IPOs because information on the issuing firms is normally very limited that the evaluation of the firms’ true value becomes difficult. This study postulates that the lockup provision has a greater influence on flipping activity in higher information asymmetry companies than in lower ones. Using data from 370 Malaysian IPOs issued from January 2000 to December 2012, the results of the multiple regression analyses show that both lockup ratio and lockup period have significantly negative impacts on flipping activities. Since lockup period is uniformly longer (1 year) prior to the 2008 Equity Guidelines revision, the results imply that investors have a greater tendency to flip during the post-2008 revision period when major shareholders are perceived to be less strongly accounted for their firms’ performance. The results also show that information asymmetry moderates the negative relationship between lockup provision and flipping activity, specifically, in regard to lockup period.

Signalling IPO quality through female directors

Purpose The purpose of this paper is to investigate whether or not the presence of female directors at the time of an initial public offering (IPO) can be considered as a signal of IPO quality. Design/methodology/approach A sample of 220 Malaysian IPOs over the period of 2005–2015 was used. This study employed the mean regression technique (ordinary least squares and White’s heteroskedasticity-consistent standard errors) and the median regression technique (quantile regression) to examine the signalling power of female directors on the board at the time of an IPO. Findings The results show that the presence and proportion of female directors at the time of the IPO have negative effects on IPO initial returns (IR). The negative effects occur at both the conditional mean and the dispersion of IPO IR. These results are robust to endogeneity bias. Practical implications The findings of this study suggest that female directors on the board at the time of an IPO can be considered as a desirable signal of IPO quality. As a result, IPO issuers can consider signalling the quality of their IPOs by having female directors on their boards. Likewise, market participants can use female directors as an instrument to value an IPO. Originality/value Studies on the impact of female directors on the board have largely been centred on established companies. Thus, this study contributes to the literature by examining the signalling role of women at the time of an IPO, which is considered as a significant milestone in the lifecycle of a company.

Does Leverage Constrain Real and AEM Around IPO Corporate Event? Evidence from the Emerging Market

The article investigates whether Malaysian initial public offering (IPO) firms engage in real and accrual earnings management (AEM) and examines the impact of leverage on the earnings management’s discretionary behaviour of the firms for the period of 2003–2013. The Dechow, Sloan, and Sweeney (1995, The Accounting Review, 70[2], 193–225) cross-sectional modified Jones model was used to estimate discretionary accruals, while Roychowdhury’s (2006, Journal of Accounting and Economics, 42[3]), 335–370) cross-sectional models were used to investigate abnormal real activity discretionary behaviour. The results indicate Malaysian IPO firms engage in real and accrual discretionary behaviour. The graphical presentations of the earnings’ management proxies indicate higher real and AEM for high-leverage firms. Similarly, the multivariate analysis indicates a positive relationship between leverage and earnings management, which is in tandem with the agency cost of free cash flow theory and debt hypothesis. It is also consistent with the pecking-order theory of capital structure. This study suggests that regulatory agencies and standard setters should continue to improve quality of accounting reports in order to protect investors’ invested capital.