The Impact of Underwriter Reputation and Risk Factors on the Degree of Initial Public Offering Underpricing: Evidence from Shariah-Compliant Companies

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Authors: Nashirah Binti Abu Bakar & Kiyotaka Uzaki, Oita University, Japan
Published: August 2014
https://doi.org/10.22492/ijbm.1.1.02

Citation: Bakar, N. B. A., & Uzaki, K. (2014). The Impact of Underwriter Reputation and Risk Factors on the Degree of Initial Public Offering Underpricing: Evidence from Shariah-Compliant Companies. IAFOR Journal of Business & Management, 1(1). https://doi.org/10.22492/ijbm.1.1.02


Abstract

IPO underpricing is an important factor used by investors to predict the profit from investment activities. Numerous empirical researches report the existence of IPO underpricing in various investment environments around the world. However, what the factors that result in such underpricing vary by country and those factors are still largely unexplored. This underpricing phenomenon is difficult to understand because various issues are related such as companies’ performance, government policy and economic condition. Thus this paper investigates the average degree of IPO underpricing listed on the Malaysian Stock Exchange (MSE) using data from 476 IPOs that occurred from 2000 to 2011. MSE is a unique stock exchange because it has two types of boards which are the shariah-compliant board and the non shariah-compliant board. 89 percent of the IPO companies are listed on the shariah-compliant board. This paper has two objectives. Firstly, this paper investigates the average degree of IPO underpricing for shariah-compliant companies and non shariah-compliant companies. Secondly, this paper investigates the impact of underwriter reputation and risk factors on the average degree of IPO underpricing. The results show that the average degree of IPO underpricing for shariah-compliant companies is 28.82 percent which is quite similar to that of non shariah-compliant companies which is 26.63 percent. Using multiple linear regression analysis this study finds that the IPO underpricing for shariah-compliant companies is driven by risk factors.

Keywords

Initial Public Offering (IPO), underpricing, Shariah-compliant companies, non Shariah-compliant companies, Malaysian Stock Exchange (MSE)