Explaining IPO initial returns in Malaysia:ex anteuncertainty vs signalling

Purpose - The purpose of this paper is to investigate whether proxies considered underex anteuncertainty hold true under a fixed price mechanism structure. In particular, the study examines whether pre-initial public offering (IPO) financial performance, measured by AltmanZ-score, can serve as a proxy forex anteuncertainty or signalling in an IPO market where a fixed price mechanism is used to determine the offer price. Design/methodology/approach - This study uses solelyex anteinformation available to prospective investors prior to the IPO to proxy forex antevariables. It also applies a more sophisticated and robust approach using quantile regression (QR) technique in addition to ordinary least squares (OLS) regression. Applying the QR technique allows the study to produce estimates for the conditional quantiles of the distribution of IPO initial returns and address the violations of basic assumptions of the standard OLS technique. Findings - The results show that forex antevariables, such asIPORISK, company size, the AltmanZ-score measure of pre-IPO performance, audit quality and the technology industry, are significantly related to IPO initial returns. However, the relationship differs across the conditional quantiles of the distribution of IPO initial returns, which would not have been recognised using standard OLS. However, the sign of the coefficients shown by some of these variables contradicts theex anteuncertainty hypothesis assumption, but they are found to have predictive power in explaining IPO initial returns. These findings reveal unique characteristics of the IPO process and investors in Malaysia. Most importantly, the AltmanZ-score is found to be significant in the lower and upper quantiles, but insignificant around the median quantile, which implies that AltmanZ-score is important for IPOs with low and high initial returns. Research limitations/implications - These findings suggest that theoretical explanations of theex anteuncertainty hypothesis cannot be generalised across financial markets, particularly in the Malaysian IPO market where fixed price offerings are common, and investors are risk averse, whereby they avoid risky IPOs, and prefer to take a small amount of returns against high risks. In addition, the composition of the companies in the market is not as large as the developed markets. This implies that the share price of the IPO may be sensitive to other disclosures in the prospectus, market sentiments or financial news. This study recommends the need for more empirical evidence for this purpose by including other important proxies ofex anteuncertainty, such as the use of IPO proceeds and risk factors that are disclosed in the prospectus to test whether theex anteuncertainty hypothesis holds true in Malaysia. Originality/value - This study fulfils the need for finding an appropriate theory that better explains IPO initial returns in the Asian IPO market by focussing exclusively on the pre-IPO information available in the prospectus. It also sheds light on important selected pre-listing information.