Prestige signals and heterogeneity of opinion regarding IPO values: Malaysian evidence

Abstract

Purpose The purpose of this paper is to examine the effects of prestige signals measured by the reputations of the underwriter, auditor and board size on the heterogeneity of investor belief about the true value of IPO in the Malaysian IPO market. Design/methodology/approach This study employs a sample of 281 IPOs issued between January 2000 and December 2015. The relationship between prestige signals and investor heterogeneity, measured by first-day price range of IPOs, is analysed using cross-sectional regression and quantile regression technique. Findings Of the three prestige signals, the findings show that only underwriter reputation and board size have significant negative relationships with IPO first-day price range. This implies that IPOs underwritten by reputable underwriters and issuing firms with larger board members have lower heterogeneity of opinion among investors. The findings also show that underwriter and auditor reputations have negative relationship with IPO initial return, suggesting that these prestige signals help to reduce IPO under-pricing, which is a direct cost of raising capital for the issuing firm. Furthermore, the results indicate that offer price, initial return, over-subscription ratio and private placement are associated with higher first-day price range. However, the findings on offer size suggest that larger IPO offer size is associated with lower first-day price range. Overall, the findings suggest that firm’s prestige signals reduce opinion heterogeneity among investors and that lower investors’ heterogeneity leads to lower IPO under-pricing cost for issuing firms. Originality/value Despite the importance of underwriter, auditor and board member reputations in signalling firm’s quality and reducing the level of information asymmetry of the listing firm’s issues, research on the effects of prestige signals on investor heterogeneity remains unexplored. This study investigates the role of prestige signals in influencing investors’ heterogeneity in Malaysia. The authors conjecture that underwriter, auditor and board member with higher reputations are associated with lower levels of opinion heterogeneity among IPO investors.

How discounts impact IPOs valuation performance and underpricing? A confrontation between warranted and unwarranted discounts

“…Whereby issuer uses signaling to reduce ex-ante uncertainty and information asymmetry between investors (Ritter and Welch, 2002). Studies document a negative correlation between underpricing and reputation, whether of underwriters or auditors (Albada et al, 2019a(Albada et al, , 2019bD. Sundarasen, 2019;Kaur and Singh, 2019;Kenourgios et al, 2007;Ong et al, 2020;Pratoomsuwan, 2012).…”

Auditors, Underwriters, and Firm Owners’ Interaction in an IPO Environment: The Case of OECD Nations

“…Similar to the reputation of auditors, prestigious investment banks are believed to be prolific underwriters, and they have extensive experience in having a business listed in stock exchanges. Due to their active participation in providing essential services in an IPO course such as legal issues, compliance, and validation, book-building, and valuing of an IPO [17][18][19], they have an impact on the IPOs' first-day returns. The credibility of these underwriters appointed by a firm is a gauge of the firm's prospects and value to prospective investors.…”

Signalling Effect of Auditor Reputation and Lock-Up Period on Over-Subscription Ratio: Evidence from Malaysian Fixed-Price IPOs

“…In Malaysia, the fixed-price method is one of the most popular methods used in setting the offer price of listing firms (Albada, Low, & Yong, 2019a;Low & Yong, 2013;Yong, 2015). In fixedprice method, the offer price of the new issue is set prior to the listing date by the promoter and the underwriter (Badru & Ahmad-Zaluki, 2018;Yong, 2015).…”

“…Finally, according to Tajuddin et al (2015), uninformed investors in the fixed-price method are faced with lower adverse selection cost than in the book-building because of the higher uncertainty involved in determining the price in the book-building method. The previous mentioned reasons helped to explain the popularity of the fixed-price method for pricing IPOs in Malaysia (Albada et al, 2019a;Low & Yong, 2013;Yong, 2015).…”

“…The literature has shown the ability of the study variables in signalling the quality of the listing firm to prospective investors and in influencing the initial return of the listing firm. Sundarasen, Khan, & Rajangam (2017), Khurana, Ni, & Shi (2017) and Albada et al (2019a) documented that reputable auditors are able to signal the quality of the listing firm by reducing the level of information asymmetry surrounding the listing firm's issues because quality auditors are costly and can only be afforded by high-quality issuing firms and they reduce the under-pricing cost that the listing firm has to bear during listing. Furthermore, Courteau (1995), Mohd Rashid, Abdul-Rahim, & Yong (2014) and Albada, Yong, Hassan, & Abdul-Rahim (2018) reported that the lock-up period can be used to signal the quality of the listing firm through undertaking longer lock-up periods, because longer periods subject the insiders to hold undiversified portfolios that consist mainly of their firm's issue and increase initial returns.…”