Underpinning Theories of IPO Underpricing: Evidence from Malaysia

Using the initial returns (offer-to-close and offer-to-open), we investigate the influence of winner’s curse, bandwagon effect, IPO lockup, size effect, and underwriters’ reputation on Initial Public Offering (IPO) underpricing in Malaysia. Based on the sample size of 114 IPO firms listed on Bursa Malaysia from January 2010 to December 2017, the finding shows that the influence of size effect is significant on both types of initial returns, that the smaller the size of the firm, the higher the mean initial return gets. We interpret it as investors’ demand for a more appealing initial return as compensation for the greater risk exposure when investing in a smaller firm. On the other hand, we found an insignificant result in terms of the relationship between the types of offer and the IPO initial returns. Thus our findings do not support the winner’s curse theory which suggests that non-private placement is associated with a higher initial return due to the adverse selection problem. We also do not find any significant relationship between IPO lockup and underpricing. Nonetheless, underwriters’ reputation is found to be negatively associated with the initial returns. This finding somehow agrees with the hypotheses made in the previous studies—where some claimed that underwriters with high reputation are able to reduce first-day initial return. Overall, the results indicate that investors keen on IPOs are still able to centre their decisions around the theories above in the quest for greater investment returns.