Does prospectus information matter in IPO pricing?

Abstract

Purpose The purpose of this study is to identify selected information from the prospectus that might signal the initial public offering (IPO) offer price. Design/methodology/approach This study uses cross-sectional data for a 14-year period from 2000 to 2014 in examining hypotheses relating to Shariah-compliant status, institutional investors, underwriter ranking and shareholder retention, with respect to their associations with the offer price of the IPOs. Further, this study uses ordinary least squares (OLS) for all models, including the models for both subsamples of Shariah- and non-Shariah-compliant IPOs. As for robustness, this study incorporates the quantile regression and quadratic model. Findings The results tend to provide support for the argument that firms with Shariah-compliant status reflect lower uncertainty and project better signalling of quality due to greater scrutiny by the government and thus are able to offer IPOs at higher prices. Similarly, firms with a higher proportion of shareholder retention indicate lower risks as insiders forego their options to diversify their portfolio, and hence could price their IPOs higher. Finally, the involvement of institutional investors and higher underwriter ranking could be used by firms to disregard information asymmetry, and therefore, the issuer might have to discount the IPO offer price. Research limitations/implications This study focuses solely on information in the prospectus that should not be disregarded by the investors in valuing the appropriateness of the IPO offer price. This study contributes in terms of providing a better understanding of the determinant factors of the IPO offer price of the firms which are Shariah-compliant. Originality/value This paper provides evidence for the determinants of the IPO offer price in a fixed pricing mechanism for both Shariah-and non-Shariah-compliant IPOs.

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

“…Underwriters set offer prices below the market equilibrium to allure investors to subscribe to IPOs and to reduce the likelihood of having to absorb losses for unsold shares. The negative result is consistent with Mohd-Rashid et al (2018), which found that prestigious underwriters priced IPOs lower to attract investors into the IPO market. In the emerging market environment, issuers spend huge amounts to hire prestigious underwriters to certify firms that have greater risks.…”

“…The OLS results showed that underwriter reputation had a significant negative association with IPO valuation. This study confirms the findings of a prior study by Mohd-Rashid et al (2018), which found reputable underwriters set offer prices lower than firms' intrinsic values to reduce the probability of having to repurchase unsold IPO shares. Nevertheless, the certification of IPOs seemed to be influenced by information asymmetry, which in turn reduced firms' values in the immediate aftermarket.…”

“…Nevertheless, the available research offers no direct evidence on the relationship between underwriter reputation and IPO valuation. This study extended the works of prior Malaysian studies on underpricing, such as Ammer and Ahmad-Zaluki (2016), Abdullah and Taufil-Mohd (2004) and Sundarasen et al (2017), as well as on pricing by Mohd-Rashid et al (2018) by narrowing down on the role of underwriter reputation in IPO valuation. In ensuring greater transparency after an IPO listing, firms prefer reputable underwriters who have superior information to issue their IPOs, thus reducing the underpricing cost and setting high offer prices.…”

Growth Opportunity and IPO Value: An Empirical Study of Malaysian IPOs

“…In the context of the Malaysian IPO market that is riddled with severe uncertainties, underwriters and issuers always set lower fixed-price IPOs offer prices to allure investors for shares subscription (Mohd-Rashid et al 2018). The credible signals of IPOs with greater growth opportunities drive investors' demands on shares (Vong 2006;McGuinness 2019) and the demands propel aftermarket prices during the first trading of IPOs.…”

“…The final offer price of Malaysian IPOs is subject to the approval of the Securities Commission (SC) in ensuring the IPO price is determined on a fair value basis (Abdul-Rahim & Yong 2010). Indeed, the offer price is set below the share prices of IPOs (Mohd-Rashid et al 2018;Yong 2015). This is due to the existence of information asymmetry problem between issuers and potential investors as the private information on actual values of firms are not incorporated into the offer prices.…”