Shariah -compliant status and investors ’ demand for IPOs: the e ff ects of information asymmetry
Ahmad Hakimi Tajuddin
School of Finance and Economics, Taylor’s University, Subang Jaya, Malaysia
Rasidah Mohd Rashid
School of Economics, Finance and Banking, Universiti Utara Malaysia, Sintok, Malaysia
Karren Lee-Hwei Khaw
Faculty of Business and Accountancy, University of Malaya, Kuala Lumpur, Malaysia, and
Norliza Che Yahya
Faculty of Business Management, Universiti Teknologi MARA, Shah Alam, Malaysia
Abstract
Purpose– The purpose of this paper is to investigate the effects ofShariah-compliant status and the presence of information asymmetry on investors’demand for initial public offerings (IPOs) in Malaysia.
Design/methodology/approach–The data regarding 260 IPOs dated for a duration of 11 years were acquired from the websites of Bursa Malaysia and Malaysian Issuing House. In evaluating the association between IPO oversubscription and the independent variables in this study, multivariate and quantile regression analyses were implemented.
Findings – It was found that Shariah-compliant status (DSHARIAH) had a significant positive relationship with IPO oversubscription. With this, it was indicated thatShariah-compliant status gains investors’ interests in subscribing to IPOs as these shares could be distributed to a wider group of investors. In the case of the proxies of information asymmetry, althoughfirm size posed significant effects on IPO oversubscription, the effects were negative. Meanwhile, institutional investors posed significant positive effects on IPO oversubscription. Furthermore, it was indicated from the negative effects offirm size that less subscription is received by largefirms which are perceived to possess lower information asymmetry from the investors. This is owing to the less underpricing provided by the issuers for their IPOs. However, it was indicated from the significant positive association between institutional investors and IPO oversubscription that the participation in the IPO among institutional investors would enhance the enthusiasm of investors for a specific stock and increase the probability of IPO oversubscription. With this, the winner’s curse hypothesis was supported.
Research limitations/implications–It is recommended that future studies investigate the compliance aspect, specifically the financial and nonfinancial aspects which may affect investors’ decision-making process for their investment.
JEL classification–G00, G01, G12, G23
The authors would like to acknowledge the research support from Fundamental Research Grant Scheme (FRGS/1/2018/SS01/UUM/02/7) (S/O Code: 14203) provided by the Ministry of Higher Education, Malaysia. The authors thank the anonymous referees for their constructive comments.
Shariah- compliant status
489
Received 20 January 2019 Revised 28 April 2019 Accepted 19 May 2019
International Journal of Islamic and Middle Eastern Finance and Management Vol. 12 No. 4, 2019 pp. 489-508
© Emerald Publishing Limited 1753-8394 DOI10.1108/IMEFM-01-2019-0026
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1753-8394.htm
Practical implications–With the availability of this study’s indicators in the prospectus, thefindings of this study have provided useful insights for an issuer and underwriter to ensure a good subscription of its issuance.
Social implications–Thefindings of this study have provided further comprehension to investors regarding the essential information found in the prospectus during the decision-making process done for IPO subscription.
Originality/value–To the best of the authors’knowledge, this is one of thefirst articles which have proven the effects ofShariah-compliant status and the presence of information asymmetry on IPO investors’demand.
Keywords IPO, Information asymmetry, Quantile regression,Shariah-compliant, Oversubscription Paper typeResearch paper
1. Introduction
Investors’ demand is pivotal in the success of initial public offerings (IPOs), and it is frequently measured by the IPO oversubscription ratio (OSR). It is shown in previous literature that IPO performance is influenced by the demand from investors (Low and Yong, 2011;Ljungqvistet al., 2006;Chenget al., 2005;Yong and Isa, 2003;Chowdhry and Sherman, 1996;Kandelet al., 1999;Leeet al., 1999). It is concluded from this body of literature that there is an association between IPOs with high demand and larger positive initial returns or a higher level of underpricing (Low and Yong, 2011;Agarwalet al., 2008). This shows the importance of investors’demand in the comprehension of IPO performance. In addition, the more attractive an IPO is in the investors’point of view, the higher the demand for its new issues, along with higher initial returns on the day of IPOs listing (Low and Yong, 2011;
Agarwalet al., 2008). Moreover, an issuer would prefer IPOs as the funding mechanism which provides afirm with a number of advantages, such as an enhanced public image of thefirm. Meanwhile, through the management of public offering done by an investment bank or an underwriter, the particular offering price which will lead to an optimal number of share subscriptions will be identified. However, the risk of IPOs not being subscribed by the market is present. Owing to the possibility of issuingfirms to prefer full subscriptions, it is clear that they will not be impressed by undersubscriptions among the investors. This will possibly diminish the ability of an investment bank to sell its allotment of the issue, which will make it susceptible to significant losses because it will need to carry the newly issued shares which are unsold, as stipulated in the underwriting agreement.
Taufil-Mohd (2007) noted that the performance of IPOs may be influenced by particularly distinguished attributes associated with each country. It is indicated that the distinguished attributes of each market are the factors of the different levels of oversubscription and underpricing in each country. In addition, it was shown byLoughran et al.(1994)that institutional differences between the pricing and allocation of shares were the significant factors of the cross-sectional differences in oversubscription and underpricing. It was also mentioned in their study that Malaysia was more regulated than other countries, and this factor would influence the pricing of new issues in Malaysia.
Shariah-compliant status is a unique attribute of the Malaysian market. With this status, it can be seen that an organisation’s activities do not involve non-permissible conducts, such as unethical elements, doubtful transactions and interest-based transactions. It can also be said that it is important that the income generated by organisations from their primary business and investment activities are in accordance with Shariah principles. This is because performing activities which are against the religious or Shariah principles are forbidden for the Muslims. Moreover, the Securities Commission (SC) Malaysia mainly performs the screening process of Shariah compliance in ensuring whether the organisation’s activities are in accordance withShariahguidelines through Bursa Malaysia and the Shariah Advisory Council (SAC). This is an important course of action, considering
IMEFM 12,4
490
that organisations which abide by Shariah guidelines are thoroughly observed and examined by the regulators during the listing process. The SAC was encouraged by the development of Islamicfinance to revise theShariahscreening methodology (effective 29 November 2013). The revision involves the introduction of thefinancial ratio (cash and debt) done to identify theShariah-compliant status. In addition, it is hoped that this course of action will encourage foreign investors, especially the ones from the Middle East, to subscribe to IPOs and fulfil Malaysia’s aspiration of transforming into a global Islamic hub for Islamicfinancial products and services.
The sections of this paper are organised as follows. The underlying theory and literature review are sated in Section 2, followed by an explanation of the data and methodology in Section 3. Thefindings and analysis are incorporated in Section 4. Finally, the conclusion and implications of the study are presented in Section 5.
2. Review of the literature
A number of models were present to illustrate on IPO underpricing, namely, lawsuit avoidance, information asymmetry, the bandwagon effect, prospects theory, market timing, signalling and winner’s curse. However, the information asymmetry and signalling were the models which gained the most attention. Rock (1986) proposed that the information asymmetry model perceives that investors are classified into two categories, namely, informed and uninformed investors. Informed investors, compared with uninformed investors, are known to have more knowledge about an organisation’s value. To attract uninformed investors to participate in the stock market, they must be compensated for this information asymmetry risk by offering a discount on the average IPOs. This explains one of the hypotheses associated with Rock’s model, that is, uninformed investors earned a risk- free rate of return.
Another explanation for IPO oversubscription is the signalling model. The signalling models ofAllen and Faulhaber (1989),Grinblatt and Hwang (1989)andWelch (1989)are in accordance with the perception that organisations have more knowledge regarding their values compared with underwriters and investors. Underpricing cannot be performed by low-quality organisations on their issues as the quality of these organisations will be known by the investors in the near future. When IPOs attract a large number of subscribers, the fair value of the organisation would increase because of the increase in the demand for the IPOs.
For this reason, investors’demand is an essential factor influencing the IPOs success.
There have been reports circulating around the phenomenon of IPO oversubscription in developed markets. To be specific, it was found byÁlvarez and González (2005),Brennan and Franks (1997),Cornelli and Goldreich (2003),Degeorgeet al.(2010),Giudici and Paleari (2001), Kandel et al. (1999) and Maeseneire and Manigart (2002) that the rates of IPO subscription were 18.35, 18.77, 9.10, 2.26, 7.69, 5.10 and 15.30 times, respectively. Besides, there was also a high IPO oversubscription rate recorded in Asian markets (Yong, 2007) and high underpricing rate recorded in China (Su and Fleisher, 1999). Meanwhile, Malaysia has been known as the country in the smaller circle of Southeast Asia with extremely high IPO underpricing (Howet al., 2007;Kimet al., 1995;Dawson, 1987). Therefore, it can be generally said that Asian countries, such as Hong Kong, Malaysia and Singapore, have higher oversubscription rates (Chowdhry and Sherman, 1996). As for Malaysia,Dawson (1987), Jelicet al.(2001),Low and Yong (2011),Taufil-Mohd (2007)andYong and Isa (2003)found that the oversubscription rates of IPOs were 44, 33.59, 41.14 and 43.71 times, respectively. In addition, it is highlighted byChowdhry and Sherman (1996)that high OSR is fairly common in the UK and most Asian countries. Besides, according toChowdhry and Sherman (1996),
Shariah- compliant status
491
countries which use thefixed pricing method have a higher level of underpricing and OSRs than those which use the US book-building mechanism.
As far as the existing literature is concerned, the number of empirical studies conducted on the oversubscription of IPOs is limited. The only literatures found in this study are the ones written byAlqahtani and Boulanouar (2017),Eng and Aw (2015),Rahmanet al.(2017), Low and Yong (2011)andTajuddinet al.(2015), which focused on IPO subscription in the Saudi Arabian, Bangladeshi and Malaysian markets, respectively. In Saudi Arabia, it was found byAlqahtani and Boulanouar (2017)that the average IPO oversubscription rate had been 6 times from 2004 to 2011. It was also observed thatShariah-compliant status had a negative impact on IPO subscription in these markets. On the other hand,Yong and Isa (2003) state that the levels of initial return in the IPOs in the Malaysian market were constantly influenced by the oversubscription ratio (as a proxy for investor demand for the IPO). However, this information was argued byLow and Yong (2011)who stated that the anomaly effects posed on IPO oversubscription were significant, especially infirms which used thefixed price mechanism. Meanwhile,Tajuddinet al.(2015)found that no significant influence was posed by private placement, the proxy for the informed visitors’involvement, on IPO oversubscription.
Furthermore, a significant negative relationship was found between organisational size and IPO oversubscription, which indicated that large organisations were perceived as having lower risks and expected to provide lower initial returns.
In the case of theShariah-compliant status, the screening criteria andShariah-compliant index function as the guidelines used by investors in making their decision of investing in Shariah-compliant equity. According to Sadeghi (2008), Mohd-Rashid et al. (2018) and Tajuddinet al.(2018), because of the permissible element in theShariah-compliant index, investors would usually give a positive response to the shares. However, the amount of investigations done on the effects ofShariah compliance on IPO listing is scarce. This investigation had only been done in Saudi Arabia and Malaysia. To be specific, it was found byAlqahtani and Boulanouar (2017)that the impacts posed byShariah-compliant status on IPO oversubscription were negative, and it was shown that this matter was taken into consideration by the issuer and underwriter when the offer price was determined. This finding was in agreement withMayes and Alqahtani’s (2015)finding, where the level of underpricing was higher in non-Shariah compliant IPOs. It was believed that higher discounts were provided by the issuer and underwriter when the offer price was determined to receive the attention from the investors and increase the subscription rate. As forShariah- compliant IPOs, its underpricing level was lower possibly because of the negative sign in IPO oversubscription.
In contrast to thefindings by the study conducted in Saudi Arabia, it was found by Abdul-Rahim and Che-Embi (2013), Abdul-Rahim and Yong (2010) andAbu-Bakar and Uzaki (2013)that there was no statistical difference betweenShariahand non-ShariahIPOs in terms of underpricing. However, all three studies found that forShariah-compliant IPOs, IPO OSRs had positive effects on the underpricing level. AlthoughAbdul-Rahim and Che- Embi (2013),Abu-Bakar and Uzaki (2013)andAbdul-Rahim and Yong (2010)discovered the relationship between IPO oversubscription and the underpricing of Malaysian Shariah- compliant IPOs, the factors which affect Malaysian IPO oversubscription were not investigated. Furthermore, what makes this study different from the study conducted by Abdul-Rahim and Che-Embi (2013), Abdul-Rahim and Yong (2010) andAbu-Bakar and Uzaki (2013)is that it investigates the factors which influence the OSR of Malaysian IPOs.
Furthermore, bothShariahand non-Shariahcompliant IPOs are combined in this study’s analysis, which significantly contributes to strongfindings. In addition, the sample used in this study takes the newly revisedShariah-compliant regulatory requirement which became
IMEFM 12,4
492
effective on 29 November 2013 into account. This study also argues that a positive sign could be shown byShariah-compliant status to investors as the new Shariah-compliant rules are stricter and they conform to the international standards which determine this status. It will not only gain the attention of the local investors, but also attract the foreign investors, especially the Middle Eastern investors, as these shares are free from non- permissible elements. Besides, it is expected that Shariah-compliant status has positive effects on IPO oversubscription. Therefore, the following hypothesis is examined:
H1. Shariah-compliant status has positive effects on IPO oversubscription.
This study also takes the impacts of information asymmetry on IPO oversubscription into account. In the Qur0anic foundation, the reduction of problems arising from information asymmetry conducted between contracting parties is a concern as follows:
[. . .], Disdain not to reduce to writing (your contract) for a future period, whether it be large or small; it is just in the sight of Allah, more suitable as evidence, and more convenient to prevent doubts among yourself [. . .]. (Al-Baqarah 2:282)
In respect of information asymmetry in the capital market, the presence of several proxies for this asymmetry was reported byAbad and Rubia (2005)andMohd-Rashidet al.(2013), where it had a significant role as a factor of IPO oversubscription. In this study, information asymmetry was specified into two variables, namelyfirm size and informed investors.
Based on the literatures selected in this article, it was found that there is a relationship betweenfirm size and information asymmetry (Che-Yahyaet al., 2017;Aslanet al., 2011;
Goergen et al., 2006; Gounopoulos, 2006; Cheng et al., 2005; Barclay and Smith, 1995;
Keloharju, 1993; Beatty and Ritter, 1986; Mohd-Rashid et al., 2017). In the case of organisational size,Aslanet al.(2011),Gounopoulos (2006)andKeloharju (1993)mention that large firms are associated with lower information asymmetry. Aslan et al. (2011) highlight that largefirms have lower information asymmetry because of a high amount of outstanding shares and the increase in the number of investors who conduct negotiation on company shares. Largefirms, compared with smallfirms, basically have a better relation with a highflow of external sources of information (Gounopoulos, 2006). Thisfinding was in agreement with the those byBeatty and Ritter (1986),Hameed and Lim (1998)andKeloharju (1993), who supported the argument that the underpricing level should be lower in large firms as the level of asymmetric information was low. In addition, it was shown that large firms possess a proven track record of the history of their operations and their data are made to be publicly available. This subsequently leads to the low level of information asymmetry (Chenget al., 2005). On the other hand,Barclay and Smith (1995),Beatty and Ritter (1986) andGoergenet al.(2006)highlight that a higher level of uncertainty is faced by smallfirms, and they also possess a higher level of information asymmetry. With this, investors face the difficulty of estimating thefirms’value (Lowryet al., 2010;Goergenet al., 2006). On the other hand,Abdullah and Taufil-Mohd (2004)state that underpricing is more prominent in large firms in Bursa Malaysia. They argue that underpricing will be reliable in reflecting the firm’s quality and it will encourage investors towards IPO subscription. Therefore, it was expected that the relationship betweenfirm size and IPO oversubscription was positive.
Pertaining to this, the following hypothesis was investigated in this study:
H2. Firm size positively influences IPO oversubscription.
Institutional investors are another proxy for information asymmetry. Based on the discussed works of literature, institutional investors are known as the investors who are
Shariah- compliant status
493
well informed of the IPO value. For this reason, they are perceived to have the knowledge and the ability to determine the particular IPOs with better prospects. Furthermore,Cornelli and Goldreich (2003)andJenkinson and Jones (2004) highlight that the IPO-distribution process often has a preference for institutional investors who comprise large and long-term shareholders.Linet al.(2007)mention that, compared with uninformed investors, informed or institutional investors have the tendency of bidding higher when IPO shares are undervalued. This is owing to their knowledge regarding the quality of the IPOs.
Meanwhile,Beatty and Ritter (1986)argue that when valuation is clouded by a certain level of uncertainties, certain risks need to be faced by the investors. To be specific, investors have to incur some costs in their search of the relevant information, which can reduce the uncertainties. This approach is similar to the approach of entering into call option when the value of the option increases with the underlying asset’s increased volatility (uncertainty).
Furthermore, Mohd-Rashid et al. (2014) and Yong (2011) have hypothesised that the proportion of IPOs subscribed by the institutional investors (informed investors) will increase when the level of IPO oversubscription and underpricing increases. Through this finding, the winner’s curse hypothesis was supported, in which there is a possibility for the uninformed investors to secure their subscription when the informed investors are absent, and this would affect the demand of IPOs. Therefore, the level of IPO oversubscription would rise when a high number of institutional investors who subscribe to the IPO gain the interest of the uninformed investors into that particular stock as well. Through these arguments, the positive effects of institutional investors on IPO oversubscription were suggested. In line with this, the following hypothesis was investigated in this study:
H3. The effects of institutional investors on IPO oversubscription are positive.
3. Methodology
The Bursa Malaysia website (www.bursamalaysia.com/market/) was the main source of information for the data collected from IPO prospectuses. The dataset from these prospectuses comprised the information related to market capitalisation, offer price, private placement, retail offering andShariah-compliant status. The closing prices of IPOs on a listing day were derived fromThe Starnewspaper, and the prices were reported a day after the listing to calculate initial returns. Meanwhile, the OSR for each IPO was reported through the Malaysian Issuing House (MIH) and Tricor Investor and Issuing House Service (TIIH). The IPO sample in this study was chosen from the list of IPOs on Bursa Malaysia dated from January 2005 to December 2015.
A total of 301 IPOs were issued when this study was conducted, as shown inTable I.
Outliers were excluded from the analyses to eliminate their effects on the results of regression. The studentised residuals approach was implemented to identify the outliers.
Table I.
Summary of IPOs by year of listing from 2005 to 2015
Listing year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Total
Total IPO 79 40 26 23 14 29 28 17 17 15 13 301
Less: Finance and REITs 7 3 5 5 0 4 0 1 1 1 2 29
Less: Uncommon type 3 2 0 0 0 0 0 1 0 0 1 7
Less: Outliers 1 1 0 0 0 0 2 1 0 0 0 5
Observation 68 34 21 18 14 25 26 14 16 14 10 260
Source:Developed for this research
IMEFM 12,4
494
Therefore, a total of 41 IPOs were exempted from the sample according to the selection criteria listed above, which indicated that the estimation of thefinal sample of 260 IPOs was done in the regression model. Thefinal samples of IPO issues, dated from 2005 to 2015, are presented inTable I.
A cross-sectional multiple regression analysis was conducted to test the hypotheses. To summarise, this study mainly aims to investigate the influence ofShariah-compliant status and the effects of information asymmetry on investors’demand for IPOs. The regression model, where three independent variables and three control variables were included, was used for the whole sample to answer the objective of this study. The equation is represented as follows:
OSRi¼b0þb1DSHARIAHiþb2FSIZEiþb3INSTIiþb4RETAILiþb5DIRi
þb6RISKiþ«i (1)
Based on this equation, the IPO OSR, which was the dependent variable in this study, was represented by investors’demand. The overall amount of shares demanded by investors was divided over the total amount of shares offered to them to determine the OSR. In this study, the dummy DSHARIAH was used to representShariah-compliant status, where the presence of Shariah-compliant status was identified by the numeric digit 1, whereas the absence of it was identified with the numeric digit 0. Meanwhile, information asymmetry was specified into two variables, namely informed investors andfirm size. In this study,firm size was measured as the natural logarithm of the market capitalisation (FSIZE), where the percentage of private placement over the total number of issued shares was used for informed investors or institutional investors (INSTI). Furthermore, three variables were controlled in this study. To be specific, RETAIL presented the retail offering percentage over the total amount of issued shares. DIR was the dummy for the initial returns which functioned as the proxy for investor enthusiasm, in which the numeric digit 1 would be assigned to that quarter if the average initial returns of IPOs in a certain quarter were higher than the average of all IPOs. Meanwhile, the numeric digit 0 would present otherwise. RISK was the corresponding offer price of IPOs.
This study’s sample consisted of IPOs with different levels of organisational size and offer price. Therefore, as the values for other independent variables in this study were in accordance with a skewed distribution, the assumption regarding the standard least-squares of normally distributed errors was not representative of this study’s dataset. To explain this point, with the presence of the proof of outliers and heavy-tailed distributions, the characteristic robustness of the quantile regression results was present for such cases.
However, this robustness was not present in standard ordinary least-squares regression estimators even to the modest departure from normality. Furthermore, the advantage was that although the mean was the focus of conventional regression, the entire conditional distribution of the dependent variable was described by quantile regressions (Uddinet al., 2017;Coad and Rao, 2006). With the quantile regression framework byTiwari (2013)and Uddinet al.(2017)as a guide, the presence of the effects of this study’s focused and control variables on the different phases of IPO oversubscription was investigated. Following was the quantile regression model in the framework byKoenker and Bassett (1978):
yi ¼xib0þ«uiwith QuantðyixiÞ ¼xib0; (2) Based on the model above,yidenotes the OSR of IPOs,xirepresents the vector of regressors, b represents the estimated vector of parameters and « represents the residual vector.
Shariah- compliant status
495
Meanwhile, withxi, theuth conditional quantile ofyiis represented by Quant (y x)u.Given the benefits of the quantile regression estimation technique over the ordinary least-squares regression, the simultaneous quantile regressions were investigated at the 25th, 50th and 75th quantiles, as presented below:
Q0:25OSRi ¼b0:25þb0:25;1DSHARIAHiþb0:25;2FSIZEiþb0:25;3INSTIi
þb0:25;4RETAILiþb0:25;5DIRiþb0:25;6RISKiþ«i (3)
Q0:50OSRi ¼b0:50þb0:50;1DSHARIAHiþb0:50;2FSIZEiþb0:50;3INSTIi
þb0:50;4RETAILiþb0:50;5DIRiþb0:50;6RISKiþ«i (4)
Q0:75OSRi ¼b0:75þb0:75;1DSHARIAHiþb0:75;2FSIZEiþb0:75;3INSTIi
þb0:75;4RETAILi þb0:75;5DIRiþb0:75;6RISKiþ«i (5)
4. Results and discussion
Table IIpresents a descriptive statistics where the sample of 260 IPOs dated from January 2005 to December 2015 was involved. It can be seen that the average IPO oversubscription rate for all of the samples was 26.56 times. Meanwhile,–0.50 times was recorded as the lowest IPO oversubscription rate. With this, it was indicated that there was a 50 per cent undersubscription rate or 50 per cent subscription rate for the overall issues, whereas 315.17 times was recorded as the highest oversubscription rate. It can be seen from the significant difference between the maximum and minimum IPO oversubscription rate that there was a wide range of demand for each IPO issued in Malaysia. With this finding, this study was provided with the opportunity of investigating the influencing factors of IPO oversubscription.
The full sample of the IPOs was separated into theShariahand non-Shariahsamples. The average oversubscription of theShariahIPOs was 28.09 times, a rate which was almost the same as that of the whole sample, which was 26.56 times. However, thisfinding was rather predicted as 85 per cent of the IPOs with theShariah-compliant status in Malaysia were issued by SAC. In addition, the market capitalisation forShariah IPOs (RM 1.01bn) was
Table II.
Descriptive statistics for variables from January 2005 to December 2015
Mean Variables
Shariah (n= 220)
Non-Shariah (n= 40)
Full sample
(n= 260) Median Minimum Maximum SD
OSR (times) 28.09 18.13 26.56 12.20 0.50 315.17 43.71
Shariah IPOs (%) – – 84.62 1.00 0.00 1.00 0.36
Market Capitalisation
(RM million) 1,010.00 692 957.00 94.03 19.90 40,400.00 4,120.00
Institutional (%) 62.15 54.79 61.02 69.69 0.00 100.00 27.45
Retail (%) 15.98 14.92 15.82 14.14 0.00 75.07 10.88
Offer price (RM) 0.95 0.88 0.94 0.70 0.12 5.20 0.79
Risk (ratio) 1.72 1.95 1.75 1.43 0.20 8.33 1.25
Initial returns (%) 16.60 14.14 16.22 7.89 78.45 404.17 47.71
IMEFM 12,4
496
larger than the market capitalisation for non-ShariahIPOs (RM 692m). The mean of market capitalisation, which representedfirm size, amounted to RM 957m, where the smallest mean was RM 19.9m, whereas the largest mean was RM 40,400m. This proved the significant difference between small and largefirms in the Malaysian market in terms of organisational size.
The average participation of institutional investors was found to be 61.02 per cent, with a maximum rate of 100 per cent. With this, it was indicated that the subscribers for IPOs mainly consisted of this group of investors. The percentage of the allocation provided to retail investors was 15.82 per cent and the highest percentage of allocation was 75.07 per cent. Furthermore, the average offer price of IPOs was RM 0.94 and the highest price of the offer was RM 5.20. As forShariahIPOs, its average offer price was RM 0.95, and this was higher than the mean price seen from the non-ShariahIPOs, which was RM 0.88. Meanwhile, the rate of IPO’s risk was 1.75 on average, and it ranged from 0.20 to 8.33. This indicated a large gap between the issues regarding the lowest and the highest risks of IPOs. Moreover, the average initial return (offer-to-close) recorded on the day of listing was 16.22 per cent, with the lowest return percentage of around negative 78 per cent and the highest return percentage of 404.17 per cent.
Based onTable III, a comparison between groups of investors with high and low demand for IPOs in terms of the median values,Shariahandnon-ShariahIPOs, large and smallfirms and high and low institutional investors is present. Each of these values was placed in Panels A, B, C and D, respectively. To be specific, in Panel A, the level of IPO oversubscription rate was substantially different across the high- and low-demand investor groups. In the case of the high-demand investor group, the median of the IPO oversubscription rate was 47.98 times, whereas for the low-demand investor group, the median of the IPO subscription rate was 5.13 times. With this, it could be seen that the medianShariahIPO recorded by the low-demand investor group was lower than that of the high-demand investor group. This suggests that investors have a preference for IPOs withShariah-compliant status. Furthermore, the median recorded by the group of investors with high demand for market capitalisation was lower (RM 167.81m) than that recorded by the other group (RM 1,746.92m). Meanwhile, compared with the price recorded by the IPO group with low demand, which was RM 1.12, a lower price was seen from the IPO group with a high demand, which was RM 0.75. This indicates that investors have a preference for smallfirms with a lower offer price. It was also worthy to note that a high participation rate of institutional investors was seen in the high-demand IPO group compared with the participation of retail investors in the low-demand group which was lower.
Meanwhile, high-demand IPO groups were also associated with a high-risk ratio as their ratio amounted to 2.07. This was higher than the ratio of low-demand IPO groups, which amounted to 1.43. With this, it was suggested that high-demand IPO groups have a belief that higher returns will be received upon their investment in high-risk IPOs. This is evident through the initial returns of 27.21 per cent recorded by high-demand IPO groups, which was higher than that recorded by low-demand groups, which only amounted to 5.24 per cent. Moreover, there were significant observed median differences between the high- and low-demand investor groups in terms of IPO OSR, Shariah-compliant status, market capitalisation, institutional investors, retail investors, offer price, retail offering, risk and initial returns. These differences amounted to 10 per cent or less, with institutional investors being an exception.
Panel B displays the level of oversubscription rate which differs substantially across ShariahIPOs subsample and non-ShariahIPOs subsample based on median values. The result showed that the characteristics of Shariah-compliant IPOs are not statistically
Shariah- compliant status
497
PanelOSR (times)Shariah IPOs(%) Market capitalisation (RMmillion)Institutional (%)Retail (%) Offer price (RM)Risk (ratio)
Initial returns (%) PanelA:Highandlowinvestorsdemand High-demandIPOs (N=130)47.980.90167.8163.1714.400.752.0727.21 Low-demandIPOs(N=130)5.130.791,746.9258.8617.241.121.435.24 Mediandifference42.850.131,579.114.312.840.370.6421.97 WilcoxonZ-statistic13.94***2.40**5.58***0.841.94*4.38***4.38***5.06*** PanelB:ShariahIPOsandnon-ShariahIPOs ShariahIPOs(N=220)28.09–1,005.5862.1515.980.951.7216.60 Non-ShariahIPOs(N=40)18.13–692.1954.7914.920.881.9514.14 Mediandifference9.96–313.397.361.060.070.232.46 WilcoxonZ-statistic1.52–1.96**0.680.580.540.541.39 PanelC:Largeandsmallfirms Largefirms(N=130)13.090.811,857.7464.8114.881.331.128.96 Smallfirms(N=130)40.020.8856.9957.2316.750.552.3823.49 Mediandifference26.930.071,800.757.581.870.781.2614.53 WilcoxonZ-statistic5.07*** 1.72*13.94*** 2.67*** 0.709.69*** 9.69*** 1.73* PanelD:Highandlowinstitutional Highinstitutional(N=130)33.410.841,486.4981.4710.730.991.8318.68 Lowinstitutional(N=130)19.700.85428.2540.5620.900.881.6713.77 Mediandifference13.710.011,058.2440.9110.170.110.164.91 WilcoxonZ-statistic1.76*0.342.43**13.94*** 8.07*** 0.980.980.83 Notes:***;**and*denotestatisticalsignificanceatthe1%,5%and10%levels,respectively
Table III.
Median values of main variables
IMEFM 12,4
498
significantly different compared with those of the non-Shariahcompliant IPOs, except for market capitalisation. Thesefindings indicate that the difference in oversubscription cannot be attributed to different characteristics betweenShariahand non-ShariahIPOs.
In addition, we also compared the difference between large and smallfirms as shown in Panel C. In Panel C, largefirms are associated with lower oversubscription, which is 13.09 times, compared with the oversubscription of smallfirms which is 40.02 times. This is consistent with Panel A. Overall, the observed median differences for OSR, Shariah- compliant status, market capitalisation, institutional investors, offer price, retail investors, risk and initial returns between high- and low-demand groups are all significant at the 10 per cent level or less except for retail investors. Further, we also explored the differences between high and low institutional investors as displayed in Panel D. High institutional investors have higher oversubscription which is 33.41 times as compared with the one from low institutional investors which is 19.70 times. This result is also consistent with Panel A.
The observed median differences for OSR,Shariah-compliant status, market capitalisation, institutional investors, offer price, retail offering, risk and initial returns between high- and low-demand groups are all significant at the 10 per cent level or less except for offer price, risk and initial returns.
A few diagnostic tests were performed prior to the cross-sectional multiple regression analysis. In these tests, the normality of residuals was investigated using the Jarque–Bera (JB) test statistics. As a result, the null hypothesis of the residuals’normal distribution was rejected by the JB normality test. However, this assumption was relaxed according to the central limit theorem and the law of a large number of observations in the analysis. To be specific, the number of observations in this was more than 200, which was a high amount.
Meanwhile, the standard errors in the ensuing regression analysis were adjusted using the Newey–West covariance estimator because the model was exposed to both heteroscedasticity and autocorrelation issues. Following that, the bivariate Pearson correlation coefficient analysis between this study’s independent variables was implemented to assess the threat of multicollinearity. The correlation matrix for all variables is shown inTable IV. It can be seen that the correlation value for most of the independent variables was lower than 0.50 (0.03- 0.40), except for the significant negative correlation between FSIZE and RISK where it amounted to 0.53. According to the range of the variance inflation factors (VIFs), which was from 1.23 to 2.91, it could be said that multicollinearity was not an issue in this study (Kleinbaumet al., 2013).
Table IV.
Pearson’s correlation matrix between variables
Variables OSR DSHARIAH FSIZE INSTI RETAIL DIR RISK
OSR 1 0.08* 0.30*** 0.21*** 0.23*** 0.27*** 0.40***
DSHARIAH 1 0.07 0.10 0.04 0.09 0.07
FSIZE 1 0.15** 0.15** 0.18*** 0.53***
INSTI 1 0.40*** 0.03 0.15**
RETAIL 1 0.04 0.14**
DIR 1 0.32***
RISK 1
Notes:***; ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively. OSR is OSR. DSHARIAH is dummy that takes a value 1 forShariah-compliant IPOs and 0 otherwise. FSIZE is the natural logarithm of the market capitalisation. INSTI is the percentage of institutional investors. RETAIL is the percentage of retail investors. DIR is the dummy that takes a value 1 if IPO is listed in a quarter in which equally weighted average initial returns are above the median and 0 otherwise. RISK is the reciprocal of offer price
Shariah- compliant status
499
Based onTable V, the role of IPOs as the factor of investors’demands (IPO subscription ratio) was found in the cross-sectional multiple regression analysis results. Thefindings of the fullShariahand non-Shariahsamples are presented in this table. To be specific, it was found thatShariah-compliant status (DSHARIAH) was a positively significant factor of IPO oversubscription. This was owing to the increase of IPO shown by the coefficient of DSHARIAH, which was 7.86 times, provided IPOs were classified as Shariah-compliant.
Therefore, thefirst hypothesis was accepted. TheShariah-compliant IPOs underwent strict monitoring processes and stringent regulations to fulfil the requirements of the SAC, SC and Bursa Malaysia. Therefore, these IPOs were more likely to be demanded by the market as both Muslim and non-Muslim investors would be attracted to the shares. Thisfinding was consistent with Sadeghi’s (2008) finding where positive reactions from investors were usually received by the shares included in theShariah-compliant index because of the permissible element of this index, which contributed to the increase in IPO oversubscription.
Thisfinding was also in agreement with those byAbdul-Rahim and Che-Embi (2013)and Abdul-Rahim and Yong (2010), who found a positive association between Shariah- compliant status and underpricing in the Malaysian market. According to them, there are advantages in issuingShariah-compliant securities. This is because the issuer would be able to raise funds easily and the shares could be sold to a wider group of investors. In addition, the demand forShariah-compliant IPOs increases as the shares of these IPOs are free from non-permissible elements. Subsequently, this status would lead to a higher investors’ demand for the IPO and an increase in the IPO subscription rate among Muslim and non- Muslim investors.
In the case offirm size or market capitalisation (FSIZE), a negative and significant association betweenfirm size and IPO oversubscription was found. The coefficient of FSIZE was–5.93, which was not in the direction hypothesised in this study. Because the coefficient of FSIZE was contradictory to its effect, the related hypothesis was rejected. This study hypothesised that FSIZE is positively related to IPO oversubscription based on the argument that it is possible for largefirms to provide more discounts as they have positive prospects (Abdullah and Taufil Mohd, 2004). However, this was not the case of this study’s
Table V.
Regression results of an oversubscription model of 260 IPOs listed from 2005 to 2015
Dependent variable is OSR Ordinary least-squares
Variables Non-Shariah Shariah Full sample
DSHARIAH – – 7.8585* (1.8019)
FSIZE 4.8976* (1.7807) 5.8822*** (3.3146) 5.9262*** (3.8996)
INSTI 0.1401 (1.2737) 0.1899** (2.1817) 0.1882*** (2.7466)
RETAIL 0.3642 (1.3530) 0.7890*** (2.7283) 0.7357*** (3.0683)
DIR 4.0148 (0.3774) 14.7984*** (2.4137) 13.6465** (2.4550)
RISK 6.6465* (2.0115) 7.8083** (1.9942) 7.2912** (2.5311)
CONSTANT 95.1102* (1.7737) 120.3897*** (3.1297) 113.9182*** (3.5179)
Observations 40 220 260
R2 0.3984 0.2440 0.2532
F-statistic 4.5037 13.8118 14.2950
Probability 0.0030 0.0000 0.00000
Durbin Watson 2.5633 1.3998 2.20120
VIF range 1.66-2.69 1.36-3.29 1.23-2.91
Notes:***; ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively. The descriptions for all variables listed above are given in the notes toTable IV
IMEFM 12,4
500
findings. This was owing to two reasons, where thefirst reason was associated with the risk-return trade-off, in which the relation between largefirms and lower risks was present.
Therefore, the IPO subscription rate would decrease as investors were compensated with lower initial returns because of the lower risk IPOs. The second reason was the proven track record of largefirms’operating history. These data had a lower information asymmetry level and their availability was made public (Chenget al., 2005). Therefore, IPO underpricing was not necessary to gain the investors’ attention. Moreover, although the level of information asymmetry for small newfirms was higher, its track record of operating history was not proven. For this reason, IPO underpricing was necessary to gain the investors’ attention. Thisfinding was in agreement with thefindings byBarclay and Smith (1995), Beatty and Ritter (1986),Chenget al.(2005),Goergenet al.(2006),Gounopoulos (2006)and Keloharju (1993), where largefirms and lower demand from investors were related to each other.
Institutional investors (INSTI) were found to have a significant positive relation with IPO oversubscription, with a coefficient of 0.19. This indicated that a“1”unit increase in INSTI would lead to“0.19”times increase in the IPO oversubscription rate. Therefore, the third hypothesis of this study (H3: institutional investor has a positive influence on oversubscription of IPOs) was accepted and it supported the winner’s curse hypothesis formulated byRock (1986). In the winner’s curse hypothesis (Rock, 1986), it is suggested that there is a higher possibility for informed investors to make an IPO subscription, provided their belief that the IPO is more likely to be underpriced. This is because of their knowledge regarding the quality of the IPOs. Moreover, owing to the IPO subscription done by a large number of informed investors, uninformed investors would eventually be interested in a certain stock, which would increase the possibility of IPO oversubscription. Therefore, this study provides additional support to Rock’s winner’s curse theory. However, it was found that retail investors (RETAIL) had a negative coefficient, which amounted to –0.74, although it was significantly associated with IPO oversubscription. Thisfinding was in line with those byAmihud et al.(2003),Chowdhry and Sherman (1996), Easley and O’hara (2004), andKoh and Walter (1989)who supported the winner’s curse hypothesis byRock (1986). Furthermore, Rock (1986)highlighted that uninformed or retail investors would usually receive a higher allocation of a “bad” IPO without noticing that the IPO is overpriced. This is because IPOs with good prospects would already be obtained by informed investors, particularly institutional investors. Therefore, as the shares with large allocations to retail investors create negative returns to uninformed investors because of being overpriced, they become a“curse”to these investors. As a result, it is impossible for investors to subscribe to an IPO with large allocations for retail investors, and this leads to a low IPO oversubscription rate.
Generally, IPO with high returns would boost investors’ sentiment to subscribe. The result inTable Vproves that investors’enthusiasm (DIR) had a significant positive impact on IPO oversubscription. To be specific, a listing during high initial returns period (e.g.
DIR = 1) would lead to 13.65 times increase in the IPO oversubscription rate. Thisfinding was in line with those byBaker and Wurgler (2006),Bayleyet al.(2006),Low and Yong (2011) and Narayanasamy et al. (2018), where investors would be attracted to the subscription of IPO with high returns during thefirst day of listing owing to the positive impression it provided to market participants. This would encourage IPO subscription among investors and increase the possibility of IPO oversubscription. It was also suggested that issuers should list their offerings to coincide with the periods when investors’ enthusiasm is high. This is essential to open the“windows of opportunity”through market optimism because of the levels of underpricing in the past or a positive economic
Shariah- compliant status
501
environment. Therefore, there is a possibility for new issues to be oversubscribed. Moreover, the reciprocal of offer price (RISK) showed a significant positive influence on IPO oversubscription through a coefficient value of 7.29. This coefficient value indicated that a
“1”unit increase in RISK would lead to“7.29”times increase in the oversubscription rate.
With this, it could be said that organisations with higher risks (lower offer price) will have a higher subscription rate from investors. This is owing to the compensation which they obtain for sustaining the high-risk IPOs. Thisfinding was in line with those byBradley and Jordan (2002)andBeatty and Welch (1996), where there was a possibility for a lower offer price to produce higher returns through investors’high demand. According to these results, all the variables of this study (Shariah, firm size, retail and institutional investors, the enthusiasm of investors and risks) were found to be the significant factors of the oversubscription ofShariahand full sample. Besides, the fact that theShariah-compliant status was owned by a majority or 85 per cent of newly listed companies was the factor of the similarities found in the association between theShariahand full sample. However, the variables of this study had an almost insignificant association with oversubscription in the non-Shariahsample except thefirm size, and risks were the only significant variables. In addition, regardless of categorisations, only these two variables significantly explained the OSR. Overall, based on the adjustedR2, it could be seen that 25 per cent of the variations in IPO OSR could be explained by the independent variables in the model. Besides the model in Table V, another model was evaluated as shown inTable VI.
The model was derived using a quantile regression model for robustness. Compared with conditional mean analysis, this model generally enables a more understandable description of the conditional distribution. With this, it was possible for this study to investigate and explain how the median was affected by a number of independent variables, regardless of the median being the minimum or maximum percentile of the dependent variables.
Furthermore, provided that strong distributional assumptions are not required in the quantile regression model, this model provides a strong approach to modelling the relationships (Koenker and Bassett, 1978). The different quantiles, where the 25th, 50th and 75th quantile of the oversubscription were included, produced an approximation of the linear relationship between a host of independent variables and a specified quantile (Koenker and Bassett, 1978). To observe the effects of information asymmetry andShariah- compliant status on IPO oversubscription, simultaneous quantile regressions were conducted using 260 IPO samples. These IPO samples were divided into three samples, namely non-Shariah,Shariahand full sample dated from 2005 to 2015. The Huber Sandwich standard errors and covariance’model were used to produce the coefficients report.
Based on the results shown inTable VI, it was observed that all variables of this study (Shariah, retail and institutional investors, market capitalisation, investors’enthusiasm and risk) were the significant factors of the oversubscription ofShariahand its full sample in the higher quantile (75th quantile). Furthermore, the coefficient of these variables was around the same level at all simultaneous quantiles.Shariah-compliant status was owned by a majority or 85 per cent of newly-listed organisations, and this resulted in the similarities found in the association between theShariahand its full sample. With this, it was indicated thatShariah-compliant IPOs pose a stronger impact with a higher IPO oversubscription rate. This finding was in line with that by Sadeghi (2008), where Shariah-certified organisations would obtain positive responses from their investors as their shares possessed the permissible elements. These reflected their quality. Meanwhile, the coefficient of market capitalisation was statistically and significantly negative at the medium and higher quantiles (50th and 75th). At the same time, the institutional investors also affected the oversubscription for Shariah and full sample across different quantiles, except for the lower
IMEFM 12,4
502
DependentvariableisOSR Quantileregression VariablesNon-ShariahShariahFullsample 25Q50Q75Q25Q50Q75Q25Q50Q75Q FSIZE2.626(0.946)2.861(1.051)5.441(1.425)0.543(0.531)1.969*(1.646)4.116*(1.768)0.701(0.920)1.7939*(1.6676)5.081***(4.134) INSTI0.083(0.965)0.074(0.915)0.031(0.258)0.042(0.849)0.034*(0.507)0.014*(0.131)0.053(1.421)0.0279*(0.4924)0.054*(0.727) DSHARIAH––––––0.520(0.214)4.202(1.2151)8.722**(2.271) RETAIL0.084(0.393)0.244(0.902)0.596**(2.160)0.123(0.664)0.353(1.346)0.705***(3.432)0.051(0.488)0.240(1.3814)0.602***(3.692) DIR3.280(0.341)18.692*(1.777)15.280*(1.959)1.299(0.514)3.600(0.894)20.767***(2.728)2.495(1.487)4.6138(1.0507)18.984***(3.315) RISK0.237(0.061)1.351(0.291)4.216*(1.770)3.591**(1.984)4.360**(2.357)8.487*(1.020)2.090*(1.487)5.236***(2.7221)4.853*(1.821) CONSTANT48.584(0.864)59.325(1.018)122.952(1.607)9.424(0.404)48.417*(1.789)105.35**(2.075)12.007(0.700)38.1135*(1.6293)113.633***(4.401) Observation404040220220220260260260 PseudoR20.0820.1490.3310.0400.0810.1550.0360.0810.176 Notes:***;**and*denotestatisticalsignificanceatthe1%,5%and10%levels,respectively.Thedescriptionsforallvariableslistedabovearegiveninthe notestoTableIV
Table VI.
Quantile regression results of an oversubscription model of 260 IPOs listed from 2005 to 2015
Shariah- compliant status
503
quantile (25th). However, this effect was positive at the medium and higher quantiles (50th and 75th). It was still worthy to note that the variables and oversubscription for the non- Shariah sample had an almost insignificant association at the 25th and 50th quantiles, except for investor sentiment (DIR) at the 50th quantile. Nevertheless, none of the independent variables of this study (market capitalisation and institutional investors) was significant at the 75th quantile, except for the control variables (retail investors, investors’ enthusiasm and risk). This indicated that the effects of information asymmetry do not play a role in the non-Shariahsample.
The percentages of the pseudoR2for the non-Shariah,Shariahand full samples were 33.1, 15.5 and 17.6, respectively, in the 75th quantile. Regardless of categorisations, only the retail offering, investor enthusiasm and risks were the significant factors of the OSR at the 75th quantile. Therefore, it can be concluded that the effect of information asymmetry (market capitalisation and institutional investors) is only statistically significant at the higher quantiles (50th and 75th quantiles) except for the non-Shariahsample. This indicates that information asymmetry has a role in influencing IPO oversubscription, especially when the IPO oversubscription rate is higher. This study’sfinding in OLS regression estimation was supported by these results. Last but not least, it was affirmed thatShariah-compliant status and the effects of information asymmetry are equally important in influencing investors’ subscription of IPOs in the Malaysia market, which are the IPOs with high information asymmetry.
5. Conclusion
In this paper, the relationship between Shariah-compliant status and the presence of information asymmetry in Malaysian IPOs subscription was analysed through a sample of 260 IPOs dated from 2005 to 2015. It was revealed in the preliminary result that the average IPO oversubscription rate was 28.09 times, and there was a major difference between high and low IPO oversubscription rates. With the unique attributes of Malaysian IPOs, such as Shariah-compliant status and fixed price mechanism, this study had the opportunity of analysing the factors of IPO oversubscription anomaly. It was found in this study that Shariah-compliant status (DSHARIAH) had a positive significance as one of the factors of IPO oversubscription. This indicates that throughShariah-compliant status, investors are attracted to IPO subscription as the distribution of shares could be done to a larger group of investors. Furthermore, it was found that investors’preference was leaning more towards the subscription to smallerfirms with a lower offer price. They were also more interested in IPOs with a higher risk (discount) as the compensation would be done with high initial returns. In addition, there were more possibilities for investors to invest in IPOs with a higher percentage of informed investors as it was an indicator of an organisation with positive prospects. This could, therefore, keep them from facing the winners’curse issue as they could prevent the subscription to IPOs with a large allocation to the retail investors. It was also seen from the regression that the level of the full sample’s oversubscription was significantly and positively changed byShariah-compliance status. Besides, it was also found that the relationship between this variable and the oversubscription ofShariahand its full sample was significant as the IPOs withShariah-compliant status was the majority.
However, the relationship between all of this study’s variables and the non-Shariahsample was insignificant, except for FSIZE and RISK. Additionally, the hypothesis of this study was accepted, except forfirm size. Apart from that, the association betweenfirm size and IPO oversubscription was significantly negative. It was indicated that there was no necessity for the issuer in large firms to underprice their IPOs to gain the investors’ attention. This was because of the presence of their proven track record of operating history
