Journal of Islamic Accounting and Business Research

Emerald Article: Initial returns of Malaysian IPOs and Shari'a-compliant status Ruzita Abdul Rahim, Othman Yong

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however. Chemmanur. 60-74 q Emerald Group Publishing Limited 1759-0817 DOI 10. 2007a) with underpricing in China being documented to be exceptionally high (Su and Fleisher. the two subsamples are driven by different factors. School of Business Management. Stocks and shares. Rock. IPOs of this subsample show similar profiles to those of non-shari’a counterparts. Since the initial returns do not revert to pre-crisis levels. 1989. Miller and Reilly. 1993.91 percent reported from the pre-crisis period of 1990-1998 to 31. The results of regression analyses on the full sample.. 1999). Loughran et al. 1989. 1969. Research limitations/implications – Future studies should re-examine the issue by taking into consideration the extensiveness of a firm’s compliance to shari’a rules and other predictor variables. 1991). 1996. the initial returns of Malaysian IPOs drop substantially from 94. 1986). 1977. National University of Malaysia. In the smaller circle of Southeast Asia. suggest that there is no drastic change with respect to factors that drive initial returns in Malaysian IPOs. 1 No.. 1987. The first is whether the IPO underpricing persists in Malaysia. 1995. and 60 Othman Yong Graduate School of Business. Malaysia Paper type Research paper Journal of Islamic Accounting and Business Research Vol. Other than the known fact that the market has just recovered from the 1997 . Originality/value – This paper is one of the first to examine the effect of shari’a-compliant status on the performance of IPOs. Ibbotson. How et al. 2008. Bangi. 2007. Reilly. Grinblatt and Hwang. 1975. whereas those of the non-shari’a IPOs are driven by risks. Baron. Design/methodology/approach – The effect of shari’a-compliant status on the patterns of initial return of IPOs is analyzed using a sample of 386 IPOs issued between January 1999 and December 2007. 1987. Kim et al. a level more comparable to that reported in advanced markets. However. Keywords Investments. Introduction The underpricing of initial public offerings (IPOs) of stocks has been widely accepted as a universal phenomenon (Allen and Faulhaber. Ibbotson and Ritter.1108/17590811011033415 1.. Malaysia. the new low IPO underpricing trend is more likely to be associated with the removal of pricing restraints. Malaysia Abstract Purpose – The purpose of this paper is to investigate the initial return patterns of Malaysian initial public offerings (IPOs) and whether shari’a-compliant status would alter such patterns. Reilly and Hatfield. Yong. Stock returns. Asian markets are no exception (Yong. National University of Malaysia. other than demand. While building new evidence to the existing literature on Malaysian IPOs is a natural course. Findings – The preliminary results indicate that over the study period.htm JIABR 1. 1. 1994. With regards to shari’a-compliant status. 1982. Bangi.emeraldinsight. 2010 pp. Chowdhry and Sherman.1 Initial returns of Malaysian IPOs and Shari’a-compliant status Ruzita Abdul Rahim Faculty of Economics and Business. given the changes that it has undergone in recent years. Initial returns of shari’a-compliant IPOs are driven by the size and type of offers. Malaysia has been known to report overwhelmingly high IPO underpricing (Dawson.99 percent. this study addresses two issues.The current issue and full text archive of this journal is available at www.

2003. Section 3 presents the data and methodology employed in this study. The remainder of this paper is organized as follows. Specifically. 2005. gharar or uncertainty. this study deviates from previous research. Hakim and Rashidian. 2006. maisir or gambling[1]. 1998.. 2004. Yong and Isa. Wan-Hussin.. This is particularly so given the more conventional emphasis in Islamic principles on the haul or adequate time for the invested capital to be put into fueling the real growth of the company. Yet. the similarity could also suggest that investors in shari’a IPOs behave more ethically and responsibly and be less aggressive in speculating the price run-up on the first trading day. which have been approved by the Council of the Islamic Fiqh in 1993 as permissible investment vehicles (Naughton and Naughton. The significance of understanding IPOs of shari’a-compliant companies separately from the generic IPO market relates well to the basic requirements of Islamic investment.. assuming that the second shari’a-screening criterion serves as an additional monitoring mechanism as is the case for socially ethical or responsible investment (Bauer et al. which in turn creates additional pressure on prices and therefore higher return on these IPOs. Saadouni et al. (2) The financial management of the company must be free from riba and impurities (El-Gamal.. the respective companies must comply with two basic sets of filters: (1) The primary business activities of the company must be legitimate or halal in accordance with shari’a principles. OICU-IOSCO. The second issue relates to the growing concerns over shari’a investment throughout the world. offer size and firm size effects as well as type of offer (Kim et al.. 2002) for shari’a IPOs. which forbid any element of: . 2005). riba or interest. and finally Section 5 concludes and discusses the implications.. 2007. particularly among Islamic countries like Malaysia. 2006). On the other hand. then the status could be interpreted as a signal of a lower risk company and accordingly lower returns to its investors. Paudyal et al. 1995. 2006. Alternatively. In the case of equity instruments. Initial returns of Malaysian IPOs 61 . 2000). and . While these criteria address the legitimacy and riba issues.Asian financial crisis. no financial instruments can be totally devoid of gharar. . 2007b) and risks (Bradley and Jordan. separately from their non-shari’a counterparts. Yong. Our study also examines the possible factors that might have contributed to the levels of IPO underpricing in Malaysia including the demand. the growing concern for Islamic investment and trend for international or global funds in Islamic equities could also result in the increasing popularity of shari’a-compliant shares. Hayat. the IPO market has undergone a pricing deregulation (How et al. it is also significant that since January 1996. Section 4 reports and discusses the results. as it examines whether shari’a-compliant status would alter the initial return patterns of the IPOs. 2000. Section 2 presents a brief background of the underpricing phenomenon in Malaysia. Jin et al. 2004).

Similar evidence of tremendous underpricing of 167. IPO issuance also needs to undergo an extensive process that involves seeking listing approval from the Ministry of International Trade and Industry and the Foreign Investment Committee in addition to the SC (Paudyal et al. which is imposed to ensure that these investors hold at least 33 percent ownership in the company (How et al. Among the first studies in which the downward trend is documented is .1 The structure Several unique characteristics are worth noting regarding the structure of the new issues market in Malaysia before the discussion proceeds to evidence of underpricing.. 2006). In addition to the pricing mechanism. the average initial excess return (adjusted for market movement) of 63 new issues persists at the high level of 114. 1998).1 62 2.2 The evidence One of the earliest evidence on IPO underpricing in Malaysia was documented by Dawson (1987). Wan-Hussin. In a separate study that concentrated only on IPOs listed in the second board. 1998). the market-adjusted initial returns are still as high as 102 percent. for all issuers of the second board and issuers of the main board whose core business is either construction or property development. 1998. These requirements are imposed to protect minority shareholders by ensuring active participation of the controlling and major shareholders in the management of the company throughout the lock-up period. 2.. 2006). refer to Wan-Hussin. 2005. Other unique features include the proportion of IPOs allocated to Bumiputera investors (Malaysian indigenous). Saadouni et al. transferring or assigning 45 percent of nominal issued and paid-up capital (Paudyal et al. Before the pricing mechanism was liberalized in January 1996.. which is regulated by the Securities Commission ((SC). In a more recent study by Ismail et al. One of the characteristics of particular concern to this study is the pricing mechanism. The removal of this pricing restraint is an attempt to improve the transparency and efficiency of the Malaysian securities market (How et al. Dawson reported that the average initial return is 166.. Paudyal et al. 2006). Using 21 new issues from 1978-1983.6 percent from 1980 to 1989. The patterns have yet to show evidence of full exploitation by investors. 2007. the SC also imposes a one-year moratorium period preventing major shareholders from selling. There is also a requirement for controlling shareholders (and the adviser) of the IPO issuing company to provide a profit guarantee of not less than 90 percent of the forecast profit reported in the prospectus and 90 percent maintainable profits for two consecutive years after listing.4 percent was found by Yong (1991). issuers and advisers are given total responsibility for setting the price.9 times. In addition.JIABR 1. while final approval from the SC is still required to ensure appropriateness.. Alternatively. the Capital Issues Committee (CIC)[2] had since 1988 been imposing pricing restraints whereby issuers must set the offer prices within a certain range of the prospective price to earnings ratio (for details of the P/E multiples. Wan-Hussin. Under the new structure.7 percent. 1998. 2007. Malaysian IPO market 2. (2007) revealed that for 322 IPOs issued from 1989 to 2000. the controlling shareholders must commit to a three-year moratorium or lock-up period after the date of listing during which they are prevented from selling the shares. Paudyal et al... the regulator of Malaysian securities market since 1993) instead of market. who also documented that the IPOs have an average over-subscription ratio (OSR) of 45. How et al. (1993).

This lower underpricing apparently coincides well with findings of two other studies. pricing restraints are among the reasons commonly given for the underpricing of Malaysian IPOs. 1990-2007 . (2008). are for a period of an equal length to the one used in this study and thus are comparable for detecting the trend in IPO returns. which coincides with the year that the SC adopts the market-based pricing mechanism. This argument clearly contradicts 200 180 160 140 120 100 80 60 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Note: The dotted line marks the year that segregated between the periods covered in Yong and Isa (2003) (1990-1998) and the present study (1999-2007) OSR = 43. Yong and Isa (2003) reported that the average initial return is still considerably high at 94.3 The transition The chronology described above apparently suggests that a transition occurs somewhere in 1997-1999. This sharp increase of initial returns could explain Saadouni et al. Another interesting trend shown in Figure 1 is that within a year after the price liberalization. but the average declines to 37.44 IPORTN = 94. 922).6 by Loughran et al. they reported that the average initial return of Malaysian IPOs is only 69.71 IPORTN = 31. the new low IPO underpricing trend is more likely to be associated with the SC’s deregulation. From 1999 onward. Note that the data for earlier periods.99 percent. such a dramatic increase could be due to an overreaction. Initial returns (IPORTN) and OSR of Malaysian IPOs. p. This finding is of particular interest to this study because in past studies.99% OSR = 32.91 percent.91% OSR IPORTN Initial returns of Malaysian IPOs 63 Figure 1. 2007b). While one can quite conveniently relate the dramatic change to the 1997/1998 Asian financial crisis. Without showing any drastic change in the demand (measured by the over-subscription ratio. From a much longer study period of 1980-2006. the IPO markets in general stabilize at 31. 2. extracted from Table I of Yong and Isa (2003. From 1990 to 1998. the fact that the trend (as shown in Figure 1) does not revert to the pre-crisis level once the market has recovered from the crisis indicates that there could be other development in the IPO market that allows this trend to persist.23 percent from 1999 to 2003 (Yong. OSR). It is interesting to note that in Figure 1 the highest initial returns are reported in 1996.’s (2005) concern over the adverse impact of the market-based pricing mechanism on the IPO underpricing. The evidence so far suggests that because the initial returns do not revert to their pre-crisis levels. as market players are still trying to absorb the “shock” in the SC deregulation. the IPO market reverts to a more steady level before it drops tremendously by the time of the crisis.

web sites of Bursa Malaysia and various securities management firms such as the OSK and the Malaysian Investment House as well as the STAR newspaper.485 14.732 129 6. Data and methodology In Malaysia.565 2 0.743 2 0.488 5.667 to 2.667 to 2.312 2 0.077 DEMANDA 32.27 percent.68 £ 106 to OFSIZE 3.342 3. Other less-commonly issued IPOs are offers like private placement.386 3. To examine the extent to which shari’a-compliant status has an implication on profiles of the Malaysian IPOs.45 £ 10 840.833 123.087 17. special issues.571 5.956 5. 64 0.941 N IPORTN 0. The data required for this study are offer prices.645 1 £ 10 1.250 IPORISKS 1.332 2 0. units offered.709 2 0.172 1.735 4.475 0. or combination of these two[3].266 351 88. 3..257 1.257 0. 1996).200 OFSIZEA 6.09 £ 107 840.000 to OFSIZE 2. . These criteria provide us with a pool of 386 IPOs.913 2 0.940 to 377. shari’a and non-shari’a IPOs. and restricted offer for sale to Bumiputera investors.659 Table I.JIABR 1. 2007).385 1.84 percent of the total 407 IPOs that were actually issued from 1999-2007 in our study. offer for sale.327 2. first trading day opening and closing prices.412 1. restricted offer for sale or public.499 4. IPOs are commonly issued either in the form of a public issue.645 Kurt J-Bera t-stat.940 to 377.406 * 2 1.661 24. 2005) but is consistent with the significantly lower IPO initial returns reported earlier in Japan after the removal of price limits and introduction of public auction (Pettway and Kaneko.05 £ 109 IPORISKA 1.931 65 17. superscripts A. the current study excludes IPO issuances that are exclusively from such types of offers. In line with Yong (2007b).445 0. This classification provides two sub-samples of 333 shari’a-compliant and 53 non-shari’a-compliant IPOs.830 8.960 DEMANDN 30.208 to 6.489 to 1.321 2 0.878 92. The data for this study are compiled from Investors Digest. Descriptive statistics of main variables Notes: IPORTN is IPO initial returns as calculated in equation (1).320 2 0.878 3.1 Variables Mean Range SD 4 £ 102 1 4 £ 102 1 5 £ 102 1 5 £ 101 5 £ 101 4 £ 101 2 £ 108 2 £ 108 5 £ 10 8 Skew 1.314 3. S and N refer to all.919 * 273 224 12 1 £ 10 1.05 £ 109 S 7 4. respectively earlier findings (How et al. the IPO returns are lower because the market prices the assets more efficiently. Bossaerts and Hillion (2001) suggested that in the absence of price limits. the sample is classified into two sub-samples according to the status of shari’a compliance of the issuing companies.01 £ 109 N 8 1.297 0.439 2 0. representing 94.217 to 3.400 to 229. This study also excludes IPOs with incomplete data for the final selection of the sample IPOs.902 8. The shari’a sub-sample constitutes 86.077 IPORTNA IPORTNS 0. In a separate study of IPOs in the USA.256 2 3.467 226 4. Z-stat.960 DEMANDS 32.000 to 3.250 IPORISKN 1. and listing board.208 to 6.64 £ 10 1. 2007.588 115. OFSIZE is offer size and IPORISK is risk of IPO as calculated in equation (2). DEMAND is OSR. OSR.633 9 £ 102 1 1.. a representation consistent with the percentage of shari’a-compliant companies currently listed in Bursa Malaysia (Securities Commission Malaysia.131 0. types of offer. Saadouni et al.

We hypothesize a positive relationship between demand for the new issues and returns to the investors. To quantify the role of the five predictor variables on initial returns of IPOs. due to investor sentiment. The supply factor is proxied by the size of IPOs (OFSIZE). which generally is estimated using the following linear regression: IPORTNi ¼ ai þ b1 DEMANDi þ b2 OFSIZEi þ b3 COSIZEi þ b4 OFTYPEi þ b5 IPORISKi þ 1i ð3Þ 65 This model specification is used to determine which (if any) of the predictor variables has a significant role in explaining initial returns on the shari’a IPOs. obtained by multiplying the offer price and the total units of IPOs offered. the smallest and most risky companies (issued and paid-up capital of at least RM2 million). shari’a and non-shari’a IPOs over the study period.We calculate the initial returns (IPORTN) for the ith IPO as: pi. the risk of the IPOs (IPORISK) is calculated as the reciprocal of the IPO offer price that is: 1 ð2Þ IPORISKi ¼ P i. Companies listed on the second board are required to have a minimum issued and paid-up capital of RM40 million and therefore may be considered medium in both size and riskiness. there is a different offer price between retail and institutional investors. which is proxied by the OSR.O ð1Þ Initial returns of Malaysian IPOs where PO is offer price and Pl is opening price on the first listing day of the ith IPOs. We hypothesize that offer size affects initial returns negatively. The main board requires a minimum issued and paid-up capital of RM60 million and therefore represents the largest and least risky companies. The initial returns (IPORTN).0 Following the risk-return trade-off.O IPORTNi ¼ pi. MESDAQ companies represent. positively related to returns. we hypothesize that they are offered at a lower price and accordingly. separately from the non-shari’a IPOs. the weighted average of the offer prices is used. Since public issue offers involved totally new issues (not originally sold to a company’s stockholders prior to listing). this study performs cross-sectional multiple regression. we hypothesize a negative relationship between company size and returns to investors. Following Yong (2007b). . which associates greater risks with smaller companies. The main predictor variable is the demand factor (DEMAND). we hypothesize a positive relationship between risks and returns to investors. as greater supply allows more subscriptions to be satisfied. considering the pressure on the first day prices is less intense. Empirical results Table I presents the descriptive statistics of the main variables for the full sample. the effect of the issuing company size (COSIZE) is approximated using board of listing. adopting the method used by Bradley and Jordan (2002). 4. Where. In line with size effect. Finally.l 2 pi. Type of offer (OFTYPE) defines whether IPOs issued are offer for sale. public issue or a combination of both.

which implies higher returns are necessary to compensate the investors. With respect to risk. The first links with the risk-return trade-off whereby smaller firms are commonly associated with greater risks. the trend consistently indicates a negative relationship between IPO returns and firm size. The average offer size of a shari’a IPO is RM44. which all tend to be positively skewed and have fat tails.10 percent).5 million while that of a non-shari’a IPO is RM164.1 66 demand (OSRs) and risks (IPORISK) of the shari’a IPOs are obviously very similar to those reported for the full sample.8109) consistently support our earlier proposition associating company size and risk. The second associates with the resulting prices (or returns) in a particular supply-demand relationship. There are two possible explanations for this phenomenon. our discussion proceeds according with the t-test to be more consistent with the reported mean values. The difference test results confirm the risk difference of IPOs of different company size. Public issue represents 60. The resulting Jarque-Bera statistics for all variables reject the null hypothesis that the data are normally distributed. Panel A of Table II shows that the initial returns of shari’a IPOs listed on the main board (22. Table I also reports the results of the distribution of the observations. Before we proceed with the discussion.62 percent of the sample (234).01 million.JIABR 1. as indicated by the t. the results of the t-test and Mann-Whitney U-test are similar. it is worthwhile to note that as in the case of Table III. Table II shows the profiles of shari’a and non-shari’a IPOs in greater detail based on company size. the subsequent differences between the two subsamples are tested using both parametric (t-test) and non-parametric (Mann-Whitney U-test) methods. Our focus is then on an interesting result concerning the IPO risk. further discussion seems a repetition of the description of Figure 1.257). which is proxied using board of listing. This to some extent supports our finding regarding comparison .49 percent) are significantly lower than those of the second board (31. which in turn have greater supply than those of MESDAQ. Integrated with earlier findings. However.475) appear to be riskier than non-shari’a IPOs (1. more rather than less supply is likely to generate less pressure on prices. Assuming a constant pool of investable funds or a constant demand for investment in IPO.7813) and highest risk for MESDAQ IPOs (2. except only stronger in a few cases involving comparisons between public issue and combination of non-shari’a IPOs.90 percent of them issued by shari’a-compliant firms. Even though the difference between the initial returns of the second board and MESDAQ IPOs is not significant. This proposition is further reinforced by the next finding on the significant negative relationship between demand (OSR) and firm size. As also shown in Panel A. the only difference detected between the two sub-samples is the size of the offer (OFSIZE). with 85. the mean values that show lowest risk for main board IPOs (0. Main Board shari’a companies seem to have greater supply (offer size) compared to those of the second board. the negative relationship implies that IPOs of larger firms report lower initial returns because the larger supply-lower demand combination subsequently creates less pressure on their prices. Accordingly.83 percent) and the MESDAQ (41. Since both the t-test and the Mann-Whitney U-test produce similar results. and only slightly higher than those of the non-shari’a IPOs. With values of initial returns and demand closely resembling that of the full sample. which in contrast to our earlier prediction indicates that shari’a IPOs (1.and Z-statistics. Unlike the more comparable number of cases of IPOs issued by listing board. Table III indicates a leniency towards public issue IPOs.

57 * * 2 15.103 * * 2 4.400 5. significant at * *1 and *5 percent levels.64x 3. second boards and MESDAQ.276 2 2.05 £ 107 8. 16.49% 31. N equals to 93. second boards and MESDAQ.588 2 1.51x 1.9290 2.996 * * 11.042 * * 2 3.226 * * 2 2.372 2 4.11 £ 106 0.19x 35.937 * * 2 4.20 £ 108 2.273 2 8.074 * * 5.41% 49. non-Shari’a IPOs IPORTN Main board Second Board MESDAQ DEMAND Main board Second board MESDAQ OFSIZE Main board Second board MESDAQ IPORISK Main board Second board MESDAQ Notes: IPORTN is IPO returns as calculated in equation (1).8251 0.9019 2.026 * * 2 3. and 14 for the main. and 104 for the main. the number of observations (N) equals to 23.8109 2 2.25% 43.80 * * 4.809 * * 2 5. DEMAND is OSR.877 2 1. Z-stat. respectively.7813 0.481 * * 2 1.036 * * 2 1.940 3. respectively.01% 11.880 2 15.154 * 22.06 * * 3. respectively. Main vs Mesdaq t-stat.10% 19.491 * * 2 4.67 £ 107 6.78 * * 2 12.208 * * 2 5.950 * * 2.520 * 2 2.699 * * 2 10. 136. Second vs Mesdaq t-stat.259 * 2 1.63 £ 108 1.359 * 7. Panel A: Shari’a IPOs IPORTN Main board Second board MESDAQ DEMAND Main board Second board MESDAQ OFSIZE Main board Second board MESDAQ IPORISK Main board Second board MESDAQ Panel B.07x 55.503 * * 2. only public issue type is allowed for IPOs listed on MESDAQ 67 Initial returns of Malaysian IPOs Table II.218 * * 2 5.032 * * 2 3.421 * * 2 9.062 2 1.413 * 2 0.Variables 2 2.452 * Listing board Mean Main vs second t-stat. Z-stat.421 2 0.514 * 2 1.789 * * 0.3722 2 3. In all non-shari’a cases.93 £ 106 0. In all shari’a cases.32x 57. Z-stat. profiles of shari’a versus non-shari’a IPOs by board of listing .83% 41.313 * * 2 2.586 2 4.075 2 0.83x 24.078 * * 2 1.804 2 3.35 * * 2 11. OFSIZE is size of offer and IPORISK is IPO risk as calculated in equation (2).288 * 2 0.191 * * 2 2.

48% 37.4247 0. DEMAND is OSR.02x 19.000 1.214 * 2 3. IPORISK is IPO risk as calculated in equation (2).30 £ 108 1.000 2 0.95x 1.174 2 2. N equals to 1.577 2 4.53% 15.158 3.842 0. and 19 for offer for sale.073 7. respectively Table III.527 * * 2 2.034 0.661 1.158 0.369 1.202 * * 2 0. and 116 for offer for sale. respectively.019 * * 27.14 £ 108 2. in all shari’a cases.621 1.021 * 2.731 2 2.074 2 0. in all non-shari’a cases. Type of offer .169 * * 2 0.9079 1. Z-stat.394 2 0.53x 24. OFSIZE is size of offer.321 * 2 0.707 2 0.851 2 2.091 2 0. 201.1 Variables 2 1.278 * * 2 1. respectively.580 0. the number of observations (N) equals to 16.76x 38.316 * * 2 3.434 2 0.60% 19.18 £ 107 0.10% 9. public issue and their combination. 33.474 2 0.414 2 1.035 * * 2 9. Profiles of shari’a versus non-shari’a IPOs by types of offers Mean value Offer for sale vs public issue t-stat.00% 38.43 £ 108 1.045 * * Panel A: Shari’a IPOs IPORTN Offer for sale Public issue Combination DEMAND Offer for sale Public issue Combination OFSIZE Offer for sale Public issue Combination IPORISK Offer for sale Public issue Combination Panel B: Shari’a IPOs IPORTN Offer for sale Public issue Combination DEMAND Offer for sale Public issue Combination OFSIZE Offer for sale Public issue Combination IPORISK Offer for sale Public issue Combination Notes: IPORTN is IPO returns as calculated in equation (1).507 2 1.44% 23.867 0.23x 5.581 * * 2 3.46 £ 107 6. Z-stat.743 * * 2 2.764 2 0. Z-stat. significant at * *1 and *5 and percent levels.8538 0.68 JIABR 1.69 £ 108 2.528 * 2 3.441 2 0.8983 2 0.260 2 1.40x 38.9790 2 0. Offer for Sale vs combination t-stat.727 * * 2 6.335 2 0.610 1.793 1.663 2 0.445 0.747 2 1. Public Issue vs Combination t-stat.141 16. public issue and their combination.

This finding is consistent with our prediction but contradictory to an earlier finding by Hiau Abdullah and Mohd (2004).e. It is also consistent with earlier findings by Yong (2007b). 2003).. 1998.e. 2007. The results for non-shari’a IPOs reported in Panel B indicate some similarities. Meanwhile. the coefficients of DOFTYPE Initial returns of Malaysian IPOs 69 . Next. However. given that the offer size of a public issue is only significantly smaller than that of a combination.48 percent) or combination (23. Meanwhile. which addresses both heteroscedasticity and autocorrelation problems. The distinctive profiles of public issue are also captured in an earlier study (How et al.24 percent higher compared to those of offers for sale (27. it seems more appropriate to conclude that the significantly higher returns on public issue IPOs tend to be driven by demand rather than supply. 2007). the results also show that there is a negative relationship between size of offer (OFSIZE) and initial returns. which concentrates only on Malaysian IPOs listed in the second board. public issue of shari’a IPOs report average initial returns of 37. The company size dummy variable (DCOSIZE) takes a value of 1 if the IPOs are issued by the second board companies and zero otherwise. at the overall level and regardless of the classification of shari’a and non-shari’a IPOs. the results in Table IV indicate that the demand factor (DEMAND) as measured by OSR plays a dominant role (consistently and highly significant with coefficients of at least 4.8010 standard errors from zero) in explaining variations in initial returns on IPOs. However. which is more than 36. Except for the non-shari’a IPOs. The mean values of risks of the IPO indicate that risks are higher for totally new issues (i.44 percent. Yong and Isa. the type dummy variable (DOFTYPE) takes a value of 1 if the IPOs are public issue offers and zero otherwise. public issues) and significantly lower for IPOs that are initially sold to the original stockholders (i. the positive coefficients of DCOSIZE indicate that high-initial returns are an attribute of second board IPOs[4].53 percent). as indicated by the insignificant differences between types of IPOs. offers for sale). initial returns are highest for IPOs that have the greatest demand and smallest supply. Differences in the demand and supply of each type of IPO strengthen the argument put forth earlier for comparison at the board level.based on type of offer. As shown in Panel A. public issue IPOs report the highest average OSR (38. In Panel A. 2006.53) and at the same time the smallest average offer size (RM246 million). the findings from this study can only be considered preliminary since none of the coefficients are significant. Consistent with earlier observations. who asserted that the positive association between firm size and initial returns is because larger firms are more capable of providing greater discounts. the IPO initial returns-firm size and demandsupply relationships are less definitive than those of their shari’a counterparts. This relationship is consistent with our proposition that the upward pressure on price of IPOs on its first listing day (therefore high-initial returns) is partly due to the post-offer date demand from investors whose subscriptions to the IPOs are initially declined. The resulting coefficients are estimated by employing the Newey-West procedure... Nonetheless. This finding is consistent with our hypothesis that initial returns of IPOs are driven by a demand factor and with results of previous studies (How et al. Wan-Hussin. We finally perform regression analyses to quantify the distinctive characteristics of second board and public issues in the form of dummy variables. That is. Paudyal et al. which shows that significantly higher initial returns of IPOs are consistently associated with public issue.

0013 (2 0.0000 1.358 Shari’a IPOs 0. The tendency for the former is slightly higher because offers for sale IPOs record higher average initial returns than those of combination (data for the full sample is not reported). Wan-Hussin.2100 (4.0071 (7.1828 (1. Paudyal et al.7984) 2 0. respectively. Second.0230) * * 7.8178) 0. .7766) 2 0. 1998.1693) * 0. the positive relationship from the shari’a IPOs is more consistent with the risk-return theory and findings by Bradley and Jordan (2002).1183) * * 2 8.0311 (0. respectively consistently indicate negative relationships between initial returns and type of offer.370 Non-Shari’a IPOs 0. initial returns of Malaysian IPOs are driven by demand (OSR) factors..457 Positive Negative Positivea Positive Positive 70 OFSIZE DCOSIZE DTYPE IPORISK R2 F-statistic p(F-statistic) Durbin-Watson Range of variable VIF Table IV. 333 and 53 for full sample. DCOSIZE is the dummy variable for company size which is proxied using board of listing and DOFTYPE is dummy variable for offer type.09 £ 102 10 (2 2.3716 5. which suggest that higher initial returns on shari’a IPOs are attributes of public issue offers.0037 (5.081-1. shari’a and non-shari’a subsamples.0812 (2 2. The strong results reported for shari’a IPOs also contradict the patterns of average initial returns reported earlier in Table III. even though the result for the non-shari’a IPOs is not significant.0101) * * 0.2209 21.2830 1. Yong and Isa.5598 0.4302 1.0859 (2 0.3532) 0.1195 (2 2.0000 1. other things equal.JIABR 1.0454) 0. Putting aside the appropriateness of the risk measure used in this study. despite the preliminary evidence relating high-initial returns to smaller firms.1 Variables Constant DEMAND Predicted sign Full sample 0.5473) 2 0. lower risks (which imply a higher offer price) are significantly associated with higher underpricing.9926) * * 0.8010) * * 2 2. The negative and weak relationship detected in the overall IPOs seems to be influenced by the negative and significant relationship reported for the non-shari’a subsample.4031 1.1699 (1. Given that DOFTYPE of 1 represents a public issue. First.100-1. the coefficients of IPORISK suggest mixed results regarding the relationships between risk and returns of IPOs. IPORISK is IPO risk as calculated in equation (2).0457) 0.7789) * * 0. such a relationship is only supported as far as second board IPOs are concerned.9242) 0.41 £ 102 11 (2 1. but the evidence is weak. this finding suggests that high-initial returns are attributes of offers for sale and/or combination types of offers.99 £ 102 13 (0.5534 0.4564) * 2 0. significant at * *1 and *5 percent levels.1887 (3. 2007. For this sub-sample. Finally. This conclusion lends strong support to earlier findings (How et al.5725 0. The findings from the regression analyses so far lead us to the following conclusions.0103 (0. 2006. DEMAND is OSR and OFSIZE is size of offer.2118 17.0734 (2 2. the number of observations (N) equal to 386.1258) * 0.0033 (4.0680 (1.107-1.0000 2.6436) 2 0. regardless of the status of compliance with shari’a. Results of regressions of IPORTN on selected predictor variables Notes: IPORTN is IPO returns as calculated in equation (1).. 2003). superscript a is to indicate that the expected sign differs from stated earlier in methodology section since DCOSIZE represents small firms.

Overall. Conclusion and implications for future studies This paper examines the profiles of the initial returns of Malaysian IPOs in the aftermath of the 1997/1998 Asian financial crisis with a focus on the implications of shari’a-compliant status. To a certain extent. (2007). Compared to the average initial returns of 94. the results of this study suggest that despite the Initial returns of Malaysian IPOs 71 . there is a very high tendency that the performance of Malaysian IPOs. The preliminary results show that there is a substantial decline in the initial returns of Malaysian IPOs. the initial returns of the two subsamples appear to be explained by distinct factors. Unlike Kim et al. (1995). the underpricing could be associated with the SC’s decision to deregulate the IPO pricing mechanism.91 percent reported from the nine years prior to the crisis period (Yong and Isa. This is done by examining the initial return profiles of shari’a-complaint IPOs separately from non-shari’a-compliant IPOs from 1999 to 2007. risk is significantly negative in the case of non-shari’a IPOs. the initial returns (31. Specifically. The negative coefficients of public issue in the overall sample and shari’a sample in the meantime are consistent with results by How et al. This is consistent with the objectives behind the SC deregulation. In general. it appears that a factor other than the crisis contributes to the new lower IPO underpricing trend. Initial returns of shari’a IPOs are more dependent on size and type of offer.particularly when involving non-shari’a IPOs.99 percent) reported from the nine-year period after the crisis are more similar to those in more mature markets. probably because more non-shari’a IPOs (43 percent) are listed on the main board than shari’a IPOs (28 percent). Overall. the co-existence of the higher risk-return duo seems to be more in line with the risk-return trade-off theory. 5. who suggest an association between initial returns and financial variables like type of offer. i. In contrast to the risk-return trade-off proposition. 2001) after the removal of price limits. this study uses 386 IPOs issued during the study period. 1996) and in the US (Bossaerts and Hillion. 2003). there are some indications that shari’a IPOs have higher returns and risks compared to their non-shari’a counterparts. A possible explanation is that in the absence of price limits. 333 of which are issued by shari’a-compliant firms. whereas those of non-shari’a IPOs are more dependent on risks. is driven by the demand factor (as measured by the OSR). other than demand. the regression models explain at best 37. While the higher returns are consistent with the growing popularity of shari’a investment. to improve the transparency and efficiency of the Malaysian security markets.16 percent of the variations in initial returns of Malaysian IPOs. A similar effect of significantly lower IPO initial returns has been reported earlier in Japan (Pettway and Kaneko. Given that the initial returns do not revert to their pre-crisis levels after the temporary impact shown in 1998. regardless of shari’a classification. While the profiles of initial returns of the shari’a and non-shari’a IPOs barely show any significant distinctions. indicating a great need for additional predictors. However. the markets price the IPOs more efficiently. and larger firms are more commonly associated with lower risks. the results of this study indicate that the association between initial returns and public issue (which seem to be detected in preliminary results) tends to be an attribute unique to shari’a IPOs.e. The results of the multivariate analyses indicate that initial returns of IPOs issued by the shari’a compliant companies are explained by the same factors that explain initial returns of general IPOs but only share one common factor with their non-shari’a counterparts.

Unlike riba. 3. (1982). pp. of which a portion (dividend) will be distributed proportionately among equity holders and that the seemingly “speculative” common stock trading is a standard arbitrage opportunity sought in any productive business transaction (El-Gamal. Offer for sale refers to shares that are already sold to the original stockholders. we find results that consistently show that DCOSIZE has no significant role in explaining initial returns on IPOs. G. 955-76. 37.. Vol. without any underlying productive activity taking place (El-Gamal. and Faulhaber. or gambling. The purpose of offer for sale is to restructure the ownership structure of the company in line with the government’s rules and regulations. Journal of Finance. (1989). Accordingly. the prohibition of gharar is somewhat less-strictly imposed for the very reason that no investment (direct or indirect) can be totally free from risk of losses (El-Gamal. further research examining the greater details of the compliance to shari’a rules and including more predictive variables should be undertaken to verify whether such a conclusion holds. Public issue refers to new shares of stocks offered to the public for the first time and therefore results in an increase in the paid-up capital of the issuing company. The difference shown in non-shari’a IPOs may be attributed to the behavior of the investors who are not governed by the Islamic rules and also the fact that more non-shari’a IPOs are larger in size and supply (offer size). 4. we group MESDAQ and second board IPOs together to take a value of 1 to capture the small firm effect on the initial returns. who in turn offer their shares for sale to the public. 2000.JIABR 1. References Allen. D. 29. there is no change in the paid-up capital of the issuing company. However. The fact that equity capital invested in productive activities of Shari’a-compliant companies generates profits. Vol. K. R.1 72 emphasis given to the classification of shari’a-compliant companies. 2. Baron. 2000). Koedijk. . Surprisingly. and Otten. 303-23. the status does not alter the patterns of initial returns of IPOs in Malaysia significantly. despite the earlier results in Table II. pp. Vol. Journal of Financial Economics. pp. CIC’s functions have been officially taken over by the SC with the tabling of the Securities Commission Bill 1992 by the Minister of Finance in October 1992.R. F.P. 2000). “A model of the demand for investment banking and distribution services for new issues”. (2006). which show that there is no initial return difference between second board and MESDAQ IPOs. the results of which are not reported to conserve space. In a separate test. 23. due to risky nature which makes the trade similar to maisir or gambling” (El-Gamal. A special case of gharar is maisir. Notes 1. p. Gharar refers to “the sale of probable items whose existence or characteristics are not certain. The prohibition of riba is unequivocal in Islam not only to avoid injustice due to its exploitative nature of the rich capital provider of the poor debtor but also to avoid injustice to the capital provider from suffering diminution on the lent capital (El-Gamal. as the proceeds from sale go to the original owner. 2000). a closer examination of the predictor variables of the shari’a as opposed to non-shari’a IPOs revealed that they are explained by different factors. R. However. 2000) have allowed common stocks to be one of the permissible investments. “International evidence on ethical mutual fund performance and investment style”. “Signaling by underpricing in the IPO market”. Journal of Banking & Finance. Bauer. 1751-67. Since March 1993.7). which is prohibited for its obvious nature of gaining merely by chance.

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