THE 10th ISLAMIC BANKING, ACCOUNTING AND FINANCE INTERNATIONAL CONFERENCE 2022
(iBAF 2022)
The Effect of Financial Ratio and Underwriter's Reputation on Underpricing:
Evidence from Indonesian IPO (2017-2021) Suharti
Faculty of Economics, Universitas Muhammadiyah Semarang (UNIMUS), Jl. Kedungmundu Raya No.18, Semarang, 50273 Indonesia
Tel: +622476740296 E-mail: [email protected]
Dedik Purwanto
Faculty of Economics, Universitas Muhammadiyah Semarang (UNIMUS), Jl. Kedungmundu Raya No.18, Semarang, 50273 Indonesia
Tel: +622476740296 E-mail: [email protected]
Abstract
This empirical study presented in this paper shows the effect of financial ratio and underwriter's reputation on IPO (Initial Public Offering) underpricing with firm age as a control variable. The financial ratio is financial leverage and profitability.
The financial leverage ratio is proxied by the Dept to Equity Ratio (DER) while the profitability ratio is proxied by Return on Assets (ROA). In this research, we use 225 companies listed on the Indonesian Stock Exchange from 2017 to 2021 as a sample.
Data analysis was performed using multiple linear regression analysis. The results of this study indicate financial ratio variable has no significant effect on underpricing, but the underwriter reputation variable has a significant negative effect on underpricing IPO (Initial Public offering) Indonesian.
Keywords: Financial leverage; Profitability; Underwriter's Reputation; Firm Age; Underpricing
1. Introduction
IPO (initial public offering) is an important thing in the development of the company, so that later the company will distribute the company's ownership rights to the public, by selling some of its shares to existing shareholders or to the public (Darmadi and Gunawan, 2013). There are several advantages for companies from going public, as it allows them to raise additional funds without the risk that might arise from debt, and encourages companies to be more transparent and accountable, as well as increase visibility and reputation. The capital market is used as a mediator meeting place for investors with publicly listed issuers (parties who need funds and issue shares) (Yuliani, et al, 2019).
The state of Indonesia is one of the destinations for investment and continues to progress because many companies carry out the Go Public process. The following is data on IPO companies that conducted IPOs on the Indonesia Stock Exchange (IDX) in 2017 - 2021, which were 255 companies, but based on existing data, 89.61% of companies that went public experienced underpricing and only 9.81% of companies experienced overpricing on the following day. first opening in the secondary market.
Underpricing itself is a condition where the stock price is lower at the time of offering in the primary market compared to the stock price on the first day in the regular market (Lestari et al. 2015). This underpricing condition causes a company to be unprofitable when conducting an IPO because the funds obtained are not optimal, but on the other hand this condition is beneficial for investors because the IPO provides a positive abnormal return (Kurniawan, 2014).
One of the factors that can affect underpricing is seen from the company's financial factors, namely financial leverage and profitability. Financial Leverage refers to the extent to which companies utilize their financial debt such as debt financing to increase profitability and is measured by total liabilities to equity. The level of debt is a major component of a company's financial structure, and unlike other risk drivers, management has complete control over the risks that result from leverage. That is, every company has fixed costs in both operational and financial activities of the company, that is, it has operational leverage or financial leverage (Onyema & Oji, 2018).
The reputation of the underwriter/underwriter can influence investors' opinions about the quality of an issuer and its long-term prospects. By appointing a reputable underwriter, the company can reduce the risk of offering shares to the public, thereby reducing the risk of under-pricing. The ability and knowledge possessed by the underwriter has proven to be a guarantee for the company. A reputable underwriter will allow the publisher to have confidence that their public offering process is handled properly. In addition, investors also expect issuers to use experienced underwriters who act as collateral for them to invest (Dominique and Kwan, 2013).
The age of the company is a calculation from the start of the company's creation until the company conducts an IPO in the capital market. Basically, when the age of the company is longer or older, the company will be at lower risk because the company presents company information that is wider and more abundant than companies that have a short lifespan or companies that have just been established so that later it will have a negative effect on underpricing because it will reduce information asymmetry and will also reduce uncertainty in the market. This is what makes the age of the company a strong enough influence on underpricing (Safitri, 2013).
In addition to the gap phenomenon described above, there are several studies that are proven to have obtained results that are different from the theory put forward by experts, so that there are still inconsistencies in research results, giving rise to a research gap. Sundarasen (2019) found that underwriter reputation had a significant negative effect on underpricing even though research conducted by Mahatidina and Yunita (2016), and also Wu, Z., and Wan, D. (2014) concluded that underpricing was not influenced by underwriter reputation. Banerjee Souvik (2015) concluded that underpricing was positively influenced by financial leverage, while Yuliani et al (2019) concluded that underpricing was not positively influenced by financial leverage. Then Syafira and Kamal (2016) concluded that underpricing was negatively affected by profitability, while on the contrary, research by Santoso (2017) stated that underpricing was not affected by profitability, due to differences from previous research results or there were still inconsistencies.
2. Theory and Hypothesis Development 2.1 Signaling Theory
The signal in question is an action for investors in providing instructions on how the company's management sees the company's prospects(Besley & Brigham, 2008:517). Signals that can be given are in the form of information about financial statements or activities that have been carried out by management in realizing company goals. The information provided by the company is important, because it can impact investment decisions by investors. Companies that will conduct an IPO will publish a prospectus, where the contents in the prospectus itself will provide the information needed. For example, information about company profitability, financial leverage or an overview financial statement, then information on the name of the underwriter service, the name of the auditor's service and also the age of the company.
2.2 Agency Theory
This agency theory is a description of the relationship between the management and the issuer / company owner which is the paradigm of the relationship between the agent and the principal. According to Jensen &
Mecklling (1976) agency relationship is a contract between two parties that contains the delegation of work and authority by the first party as the principal to the agent or second party, intended so that the second party is willing to do work in the interests of the first party, here what is meant is with the agent is the management who provides managerial services to manage the company, while the owner of the company itself is the principal who will give trust to the agent.
The parties that act as agents and also principals in the IPO and in the case of underpricing are the issuer as the principal while the underwriter is the agent. The motivation of the issuer (principal) itself is to obtain or obtain maximum profitability in the IPO by contracting with the agent (underwriter). Meanwhile, the agents (underwriters) themselves are motivated to maximize the fulfillment of economic needs in obtaining loan investments or compensation if they do not sell, so that usually the issuers themselves set the IPO share price at a lower price, resulting in the phenomenon of underpricing.
2.3 Hypothesis Development
Based on the explanations and theories above, this study proposes 3 hypotheses below:
1. H1: Financial Leverage has a significant positive effect on underpricing.
2. H2: Profitability has a significant negative effect on underpricing.
3. H3: Underwriter's Reputation significant negative effect on underpricing.
The Role of Firm Age Control Variable
Firm age (company age) as a control variable is something that is very much considered by most investors besides that the age of the company may affect the company's underpricing, because the control variable is able to increase market confidence in the company's performance when the company will conduct an IPO on the IDX.
Regarding underpricing, the control variable using the age of the company will be able to reduce information asymmetry and market uncertainty will be smaller which will cause the level of underpricing to be lower.
Information related to the age of the company can be a positive signal for investors. Companies that are much earlier in the business world or that have a longer lifespan of course will have more experience to develop their business, because the methods to maintain the company have already been carried out. Companies with longer standing times have a lot of experience so that they are able to survive for a longer time is evidence that can be given to the business world. (Kuncoro & Suryaputri, 2019).
Figure 1. (a) Theoretical Thinking Framework
3. Methodology and Data 3.1 Data and Sample Selection
This study's population is Indonesia company that already go public in 2017 until 2021, and there are 255 company. The sampling technique used in this research is the non-probability purposive sampling technique. The data sample is chosen based on subjective considerations from research where the requirements made as criteria must be met as a sample. The sampling requirement in this research are as follows:
1. Company that already go public in the period 2017 to 2021.
2. Company have complete data in financial statement and names of underwriter IPO.
The procedure for selecting these criteria results in a final sample of 225 banks.
Table 1. Sample Selection
Total Company IPO in BEI during 2017 -2021 255
Less: the company with the data not available 30
Final Empirical Sample 225
3.2 Research Variable
Variable Definition Measurement
Dependent (Y)
Underpricing a condition where the stock price at the time of offering in the primary market is lower than the stock price on the first day in the secondary market (Darmadi & Gunawan, 2012)
Underpricing :
/.!"%0#$%
0#$% x 100%
CP12: Closing price, first day in the secondary market.
R345: Initial share price.
Financial Leverage (X1)
DER is a ratio to indicate the amount of funds between own
capital used to pay debts (Sartono, 2010) DER: 6)$78 :;7<;8;$=
6)$78>?@;$7A
Profitability (X2) ROA provides a measure to assess the overall efficiency with which assets are used to generate operating net income (Mahatidina, 2017)
ROA: .()B;$ 7B$C( $7D 6)$78 EAAC$
Reputation Underwriter (X3)
The reputation of the underwriter used by the company that will conduct the IPO (Sundarasen, 2019)
Underwriters who are ranked in the top 10 are given a score of 1, underwriters who are not in the top 10 and a value of 0 are based on the total frequency of underwriters before the IPO year.
Firm Age (X4) Age of the company is the time between the initial creation of the company to the present time (Safitri, 2018)
Age: company year IPO - company year of establishment
3.3 Analysis Method
The analysis method used in this research is multiple regression analysis. The equation model is:
Equation 1:
Un = α + β1X1+ β2X2 + β3X3 + + e Equation 2:
Un = α + β4X1+ β5X2 + β6X3 + β8X4+ e Where:
Un = Underpricing α = Konstanta β = Koefisien Regresi X1= Reputasi Underwriter X2= Reputasi Auditor X3= Financial Leverage X4= Profitabilitas X5= Firm Age 4. Result and Discussion
Before processing the data into regression, it is necessary to do a normality test, which is a test that shows whether the data used has a normal or abnormal distribution. Below is a table of Normality Test Output for the regression model as follows:
From table 2 above shows the results of the normality test of the regression model, the Test Statistics is significance level of 0.059. The significance value is 0.059> 0.05 and the conclusion is that the data is normally distributed. The following is table 3 which contains a summary of the results of partial hypothesis testing in model 1 and model 2 using SPSS are as follows:
Table 3. Model 2 Regression Result Model
Unstandardized Coefficients
Standardized
Coefficients t Sig. Collinearity Statistics
B Std. Error Beta Tolerance VIF
1 (Constant) 23.204 1.624 14.291 .000
ROA -.051 .073 -.027 -.705 .481 .994 1.006
DER -.065 .139 -.025 -.470 .639 .509 1.963
Reputasi Underwriter -9.997 2.467 -.159 -4.053 .000 .942 1.061
Umur Perusahaan 1.247 .085 .792 14.666 .000 .494 2.023
Notes:Results from the regression are reported. The sample period is from 2017-2021. Variable dependent is underpricing and variable independent is ROA, DER, and reputation underwriter, firm age is control varible.
Before doing the regression, we need to do the models test first, there are two tests to consider the models that suit the regression. In the table above model 2, it can be interpreted that underpricing is negatively and significantly affected by underwriter reputation because the significance level is < 0.05, while financial leverage and profitability variables have no significant effect on underpricing, because the significance value is > 0.05 while the control variable of company age has an effect on underpricing. The regression models in this study are:
Y = 23.204 - 051 X1 - 065 X2 – 9.997 X3 + 0.142 X4
Table 2. One-Sample Kolmogorov-Smirnov Test
N 225
Normal Parametersa,b Mean .0000000
Std. Deviation 12.89947539
Most Extreme Differences Absolute .091
Positive .066
Negative -.091
Test Statistic .091
Asymp. Sig. (2-tailed) .000c
Monte Carlo Sig. (2-tailed) Sig. .044d
99% Confidence Interval Lower Bound .039
Upper Bound .059
4.1 Discussion
4.1 1 The Effect of Financial Leverage on Underpricing:
Based on the test results of the two models, it shows that financial leverage has no significant positive effect on underpricing. The second model, financial leverage has a coefficient of -0.065, the regression coefficient of financial leverage in model 1 is negative, which means that financial leverage (DER) has a non-unidirectional relationship with underpricing, which means that each increase in DER by one unit will cause a decrease in underpricing of 0.065 % if the factor -other factors are held constant.
The significance probability value in both models is > from 0.05 and has a different direction from the hypothesis, thus proving that the third hypothesis (H1) is rejected. Thus, underpricing is not proven to be positively and significantly influenced by financial leverage. This finding agrees with the research conducted by Yuliani, et al (2019), Purwanto and Mahyani (2016), and also Syafira and Kamal (2016), and Argo & Siswantini (2017).
The results of this study are not in accordance with the existing signal theory and agency theory because if the company has high debt, it will be predicted that the company will be more difficult to run for the future, so that potential investors also have a lot of consideration when buying shares for which the company has high obligations.
4.1.2 The Effect of Profitability on Underpricing:
Based on the test results of both models indicate that profitability does not have a significant negative effect on underpricing. In model 2, the profitability variable has a coefficient of -0.051, the profitability regression coefficient in model 2 is negative, which means that profitability has a direct relationship with underpricing or or every increase in profitability (ROA) of one unit will cause an increase in underpricing of 0.051% if other factors considered constant.
The significance probability value in both models is greater than 0.05 and has a different direction from the hypothesis, thus proving that the fourth hypothesis (H2) is rejected. Thus, profitability is proven to have no negative and significant effect on underpricing. The results of this study failed to prove the effect of ROA on underpricing. The results of this study are in line with research conducted by Retnowati (2013), Kristiantari (2013), Rust (2015) and Darpius, et al (2019) which have proven that underpricing is not influenced by profitability variables.
The results of this study are not in line with signal theory and agency theory which assume that financial statements from management are able to increase investor confidence and are able to reduce the level of underpricing.
4.1.3 The effect of reputation underwriter on underpricing:
The coefficient on the second model has decreased so that it can be said that the control variable is not able to improve the model on the underwriter reputation variable. While the second model for the significance probability value is <0.05 and proves that hypothesis one (H3) is accepted. Thus, underpricing can be significantly negatively affected by the underwriter's reputation.This study agrees with the research of Sundarasen (2019), Yuliani et al (2019), Adityawarman (2017) and also Gumanti et al (2015). This study is able to show that underwriters who have a high reputation are able to reduce uncertainty, and are more daring to take decisions in providing high prices at the initial stock price and as a result of the quality of the guarantor, so that the level will not decrease or become low. This research is in line with signal theory and agency theory according to investors, underwriters are considered to have more complete information about the condition of the issuer so that underwriters who have a high reputation will set the initial stock price according to the condition of the company.
The influence of the underwriter's reputation variable on underpricing shows that the more prestigious the underwriter's reputation is, the lower the underpricing level will be. Determining the price of the issuer's initial stock offering usually the underwriter plays a very important role, especially if the reputation is high or good and is believed by potential investors that when setting the initial share price, it must set a fair price, because the underwriter with a good reputation certainly has a lot of information related to the condition of the issuer. current market, so that when listed on the Indonesia Stock Exchange the share price in the secondary market did not experience a significant increase. Therefore it will reduce the level of undepricing.
5. Conclusion
This study aims to obtain empirical evidence and analyze the effect of financial leverage, profitability and underwriter reputation on underpricing and firm age as variable kontrol. The financial leverage ratio is proxied by the Dept to Equity Ratio (DER) while the profitability ratio is proxied by the Return on Assets (ROA). The
population in this study is a company that conducted an IPO (Initial Public Offering) on the Indonesia Stock Exchange in 2017-2021. The total sample used in this study was 225 companies based on predetermined criteria.
Data analysis was performed using multiple linear regression analysis.
From the results of data analysis and the discussion discussed, it can be concluded, among others: the data used in this study were normally distributed, there were no signs of heteroscedasticity and free from multicollinearity problems. From the results of multiple linear regression testing of the second model after adding control variables, it can be concluded that from the 3 hypotheses in this study there is 1 accepted hypothesis, namely the influence of underwriter reputation on underpricing and 2 rejected hypotheses, namely the influence of financial ratios on underpricing.
Future research is expected to include expanding the parameters and scope of the current study or expanding the population or object of research not only in Indonesia but also by adding other countries, such as ASEAN countries. In addition, it is necessary to add other variables such as board independence, ownership concentration, institutional ownership, corporate reputation, and ownership retention variables. Besides being able to add other control variables such as listing delay, oversubscription, issue size, board size, number of female directors, market conditions, and also firm size, because the addition of control variables can help improve the accuracy of variable estimates, eliminating some distortions. and noise, as well as increasing the conservativeness of the hypothesis test and would be in line with that approach (Becker, et al., 2016; Bernerth et all., 2017). In addition, with additional control variables, it is expected to add value to the adjusted R square in the output of research data Reference
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