Do IPO Hot and Cold Markets Exist at the Indonesia Stock Exchange?

Abstract

This study focuses on IPO Initial Returns in Hot and Cold IPO Markets at the Indonesia Stock Exchange (IDX) between the period of 2001 and 2005. This study uses a regression analysis where the first day IPO stock return is the dependent variable and a dummy variable that represents Hot and Cold IPO Markets is the main independent variabel. It is found that Hot and Cold Markets do exist at the IDX. More importantly, it is found that the difference in IPO Initial Returns between Hot and Cold Markets while controlling for other factors is 36.8%. The Investment Sentiment Hypothesis has been found to explain the existence of Hot and Cold Markets. The hypothesis implies that jumps in IPO Initial Returns during Hot Markets are due to the increase in the first day closing prices which are higher than the increase in the offering prices. The Monopsony Power Hypothesis and information spillovers across IPOs respectively may also provide alternative explanations to the phenomenon. Investment banker community in a small economy learns information from each other and, thus, has full information on the number of firms that will go public in the following period. Consequently, investment bankers have a high bargaining power of investment bankers in lowering the offering prices.

Analysis of IPO Performance in Indonesia in the "Hot Market" Period and Its Influencing Factors

“…The underpricing phenomenon often occurs during IPOs. The results of previous studies have documented the occurrence of underpricing of IPO shares on the IDX (Husnan et al, 2015;Irfani, 2014;Warganegara & Warganegara, 2014). The results of Warganegara and Warganegara's (2014) study show the occurrence of underpricing of IPO shares on the IDX in the "Hot Market" periods of 2001 and 2002, where the "Hot Market" periods were marked by the large number of new companies that carried out IPOs in the "Hot Market" periods of 2001 to 2005.…”

“…The results of Warganegara and Warganegara's (2014) study show the occurrence of underpricing of IPO shares on the IDX in the "Hot Market" periods of 2001 and 2002, where the "Hot Market" periods were marked by the large number of new companies that carried out IPOs in the "Hot Market" periods of 2001 to 2005. According to Warganegara and Warganegara (2014), the underpricing phenomenon can be explained by the investment sentiment hypothesis, where the initial yield in the "Hot Market" period is very high, causing the closing price on the first day to skyrocket compared to the initial offering price.…”

“…However, if there is an information asymmetry, it will be difficult to achieve market efficiency. Loughran and Ritter (2002) and Warganegara and Warganegara (2014) explain that information asymmetry can lead to information direction for investors, where potential investors not only use their information to buy new shares (new issue), but they also pay attention to the actions of other investors in making decisions. The theory underlying the investor behavior is Ritter and Welch's (2002) investor's sentiment theory, where initial return will increase if investors are very enthusiastic and give a positive reaction.…”

“…This study discusses the possibility that during the "Hot Market" period the closing price of the first day increases while the offer price decreases, or what is often referred to as underpricing. Previous studies in Indonesia have explained that there is a possibility of underpricing during the "Hot Market" period (Warganegara & Warganegara, 2014). A study conducted by Husnan, Hanafi, and Munandar (2015) shows that on average underpricing occurs as much as 23% of the 231 IPO companies on the IDX for the period 1995 to 2012.…”

The accuracy of earnings forecast in IPO prospectuses: Evidence from Indonesia

“…So researchers want to re-examine the accuracy of earnings forecast and the factors that influence it with the latest data samples, namely companies that have IPO in Indonesia in the 2015-2018 period. By taking the 4 variables tested in Hasan, Hadad, & Ahmed (2016), add 3 variables from the research of Amer & Ahmad-Zaluki (2017) and add 1 variable by Warganegara & Warganegara (2014).…”