Relationship between prestige signals and over-subscription ratio

Abstract

Purpose The purpose of this paper is to examine whether initial public offering (IPO) over-subscription is a function of firm’s prestige signals conveyed by third parties with reputational capital such as underwriter, auditor and independent non-executive board member. Design/methodology/approach The relationship between prestige signals and over-subscription ratio (OSR) of IPOs is analysed using a cross-sectional regression based on a sample of 393 IPOs issued between January 2000 and December 2015. Findings The results indicate that IPOs underwritten by reputable underwriters have lower OSR than those underwritten by non-reputable underwriters. While issuer engages reputable underwriter to certify firm quality to reduce information asymmetry, the action brings with it lower initial returns for its IPO. Investors interpret the signal conveyed by issuer’s choice of underwriter from under-pricing perspective and respond accordingly by reducing IPO demand. This implies that investors regard under-pricing as a more valuable signal than firm quality signal associated with underwriter reputation. The findings also indicate that over-subscription increases in IPOs that have above average initial returns and higher institutional participation. Issuing firms that go public in a period of high IPO volume are associated with low OSR. Originality/value This is the first paper to examine the relationship between the prestige signals and OSR of IPOs in the Malaysian context.

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

“…The result indicates that investors prefer quick capital gains from IPOs rather than perceiving firms' qualities. This argument is supported by Albada et al (2019), where the signals of firms' qualities conveyed by reputable underwriters did not trigger investors' demand for IPO shares. Investors sell their shares in the aftermarket since they perceive high levels of uncertainties of IPOs, which motivate the selling of shares by investors.…”

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

“…The signalling theory is the binding force that glue this paper together. In short, we argue that the ex-ante information available to investors is able to signal the quality of the listing firm to the market and help the listing firm in gaining the attention of prospective investors, which lead to high OSR (Albada et al 2019c;Tajuddin, Abdullah, & Taufil-Mohd, 2018). The present study is interested in some ex-ante information that is able to signal the quality of the listing firm and could influence the subscription demand of the listing firm's issues.…”

“…Over-subscription ratio (OSR) provides the listing firm with a beam of hope in measuring investors' demand (Albada, Yong, & Low, 2019c;Low & Yong, 2011). According to Albada et al (2019c), OSR is able to measure investors' demand for the listing firm's issues because OSR represents the number of times an IPO is oversubscribed.…”

“…Over-subscription ratio (OSR) provides the listing firm with a beam of hope in measuring investors' demand (Albada, Yong, & Low, 2019c;Low & Yong, 2011). According to Albada et al (2019c), OSR is able to measure investors' demand for the listing firm's issues because OSR represents the number of times an IPO is oversubscribed. Furthermore, according to Chowdhry and Sherman's (1996) model, most of the markets that use the fixed-price method, especially Asian IPO markets, are faced with high OSRs and initial returns than countries that use the book-building method.…”

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).…”