The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1321-7348.htm
ARA
26,1
84
Received 23 November 2016
Revised 27 March 2017
31 July 2017
28 September 2017
Accepted 31 October 2017
Asian Review of Accounting
Vol. 26 No. 1, 2018
pp. 84-106
© Emerald Publishing Limited
1321-7348
DOI 10.1108/ARA-11-2016-0133
Explaining IPO initial
returns in Malaysia: ex ante
uncertainty vs signalling
Bazeet Olayemi Badru and Nurwati A. Ahmad-Zaluki
Othman Yeop Abdullah Graduate School of Business,
Universiti Utara Malaysia, Sintok, Malaysia
Abstract
Purpose – The purpose of this paper is to investigate whether proxies considered under ex ante uncertainty
hold true under a fixed price mechanism structure. In particular, the study examines whether pre-initial public
offering (IPO) financial performance, measured by Altman Z-score, can serve as a proxy for ex ante
uncertainty or signalling in an IPO market where a fixed price mechanism is used to determine the offer price.
Design/methodology/approach – This study uses solely ex ante information available to prospective
investors prior to the IPO to proxy for ex ante variables. 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 for ex ante variables, such as IPORISK, company size, the Altman Z-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 the ex ante uncertainty 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 Altman Z-score is found to
be significant in the lower and upper quantiles, but insignificant around the median quantile, which implies
that Altman Z-score is important for IPOs with low and high initial returns.
Research limitations/implications – These findings suggest that theoretical explanations of the ex ante
uncertainty 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 of ex ante
uncertainty, such as the use of IPO proceeds and risk factors that are disclosed in the prospectus to test
whether the ex ante uncertainty 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.
Keywords Malaysia, Quantile regression, IPO underpricing, Altman Z-score, Initial returns
Paper type Research paper
1. Introduction
Studies on initial public offerings (IPOs) have established a recurrent pricing irregularity in
virtually all financial markets around the world, including in Asia. Specifically, on average,
IPOs exhibit high positive initial returns on the first trading day, which is commonly
referred to as underpricing. Underpricing occurs when the offering price of an IPO is lower
than the closing price on the first trading day. The finance literature has provided a list of
explanations for this phenomenon using information asymmetry theories, such as the
winner’s curse, ex ante uncertainty and signalling theories, among others (Rock, 1986;
Ritter and Welch, 2002). The ex ante uncertainty is the ex ante risk associated with an IPO
company. Thus, underpricing should increase with an increase in ex ante uncertainty about
the company’s value. In contrast to the ex ante uncertainty hypothesis, the signalling theory
suggests companies send signals to the market by underpricing their IPOs, indicating that Explaining
high-quality IPO issuers would underprice more in order to signal their quality. However, IPO initial
it remains unclear whether the ex ante uncertainty hypothesis or signalling theory provides returns in
better explanation of IPO underpricing (Yong, 2007).
Academic scholars are of the view that IPO underpricing is more severe, especially in Malaysia
young, small and private technology companies because prospective investors lack indicators
to assess private companies going public (Beatty and Ritter, 1986; Rock, 1986). These types of 85
companies are characterised by high information asymmetry (e.g. unpublished annual
reports, no pre-operating history, etc.) and uncertain prospects, making such IPO shares
inherently difficult to value (Beatty and Ritter, 1986; Lowry et al., 2010; Rock, 1986).
The valuation uncertainty relates to the level of information asymmetry of the IPO
companies, which results in adverse selection problem. Hence, underpricing is used to
efficiently respond to complexities in the valuation of a company going public to allow
prospective investors, particularly uninformed investors, to achieve a reasonable return for
their valuation uncertainty (Ritter, 1984; Lowry et al., 2010). In this context, the expectation
is that the higher the level of valuation uncertainty, the higher the level of underpricing
(i.e. positive initial returns).
This issue has been studied extensively; however, most empirical studies have faced the
challenge of finding appropriate proxies for ex ante uncertainty (Ljungqvist, 2007, p. 387)[1].
In addition, very few studies have focussed on the impact of information provided by IPO
issuers in the prospectus on IPO underpricing (Bhabra and Pettway, 2003). More
importantly, the unresolved issue is finding an appropriate proxy for pre-IPO performance
(Gasbarro et al., 2003). Agathee et al. (2012) demonstrate that Altman Z-score can serve as a
good predictor of ex ante uncertainty more than being a signal of a company’s quality. Since
then, the validity of these variables has received little attention in the Asian IPO market,
particularly in Malaysia. The Malaysian IPO market, however, may present a different
picture due to its method of pricing, which is fixed price mechanism structure instead of
auction/book-building as used in the USA, the UK and Japan, among others. Hence, the aim
of the current study is to test the validity of these variables along with pre-IPO performance
under a fixed price mechanism structure.
In a fixed price mechanism structure, the degree of ex ante uncertainty surrounding share
prices of IPOs is considered high because the offer price is mainly set between the promoter
and the underwriter; therefore, prospective investors are subjected to high ex ante uncertainty
regarding the value of the company’s IPO shares (Dehghani and Sapain, 2014). This may lead
to a high level of mispricing for issuers with strong pre-IPO performance. By implication,
high-quality issuers would be associated with high underpricing and low-quality issuers
would be associated with low underpricing (Beckman et al., 2001). Therefore, underpricing
would be considered as a signal of companies’ quality in the market. Based on this premise,
the present study assumes that Altman Z-score, which Agathee et al. (2012) consider as a
proxy for ex ante uncertainty, may play a signalling role in the Malaysian IPO market.
The Malaysian IPO market is a unique market to test the use of Altman Z-score because
companies seeking listing on the stock market are required to have a sufficient level of
working capital at the time of submission of their listing applications to the Securities
Commission. In addition, because of several cases of corporate failures over the last few
decades (see Ong et al., 2011) and corporate misstatements (Asyiqin et al., 2014), it has
become imperative to access the pre-IPO financial health of companies in the Malaysian
capital market. Similarly, an important reason as to why Bursa Malaysia has introduced the
new listing requirement guidelines[2] relating to financial condition and level of operations
of listed issuers is to promote efficiency and credibility of the market to strengthen the
protection of investors. Therefore, investigating the theory that holds for Altman Z-score is
of crucial importance because the IPO market plays a critical role in the economy via capital
ARA allocation and attracts domestic and foreign investors. For example, the Malaysian capital
26,1 market is currently ranked fifth in Asia relative to GDP and is home to the largest number of
publicly listed companies in ASEAN[3]. Thus, assessment of pre-IPO financial health of IPO
issuers is vital to ensure the sustainability of the IPO market.
This is more so since investors would need ex ante rather than ex post information before
making an investment. Ex ante information would allow investors to access the uncertainty
86 and signalling quality of the companies they want to invest in because investors need
that information before and not after they invest. Although many IPO studies have
examined information provided in the prospectus in addition to other market variables in
relationship to initial returns, but very few studies (e.g. Ammer and Ahmad-Zaluki, 2016;
Abdul Rahim and Yong, 2010) have focussed exclusively on pre-IPO information in a single
model and tested its implications with respect to IPO initial returns.
Furthermore, none of these studies has considered the composite measure of pre-IPO
performance (Altman Z-score) on IPO initial returns, whereas this measure provides
substantial information on the full assessment of the financial characteristics of the IPO
company simultaneously, namely, liquidity, profitability, productivity of assets, gearing and
income-generating ability of IPO companies prior to listing. Among the composition of
Altman Z-score model factors such as the liquidity, gearing and productivity of the assets
have been found to be significant in predicting the financial distress of already established
companies in Malaysia (Ong et al., 2011). Hence, the current study fills this gap in the
literature. Specifically, variables included are IPORISK (measured by the reciprocal of IPO
offer price), company age, company size, Altman Z-score measure of pre-IPO performance,
underwriter’s reputation, audit quality, inverse of gross IPO proceeds and industry type
(technology vs non-technology).
This study contributes to the IPO literature by using a composite measure of pre-IPO
performance, i.e., Altman Z-score. A similar Altman (1993) model was used to adequately
predict the financial distress of established companies in Malaysia (Hasnan et al., 2013).
In addition, a more robust and sophisticated technique, i.e., median regression estimators,
known as quantile regression (QR) technique, in addition to the ordinary least squares (OLS)
regression is employed. Prior studies have consistently reported that a wide dispersion
between the mean, median and maximum values of initial returns data always exists
(see Ammer and Ahmad-Zaluki, 2016; Abdul Rahim and Yong, 2010 for Malaysian data and
Ritter and Welch, 2002 for data in the USA). However, the most common technique used is
the OLS, which is based on the conditional mean function, thereby making most studies
unable to explain low and extremely high initial returns. For example, a look at the initial
returns data presented in Table I and Figure 1(a) and (b) indicate the variations in the mean,
median and maximum values of IPO initial returns data. In addition, the failure of the data
of this study to meet assumptions such as normality and homoscedasticity of the residuals
when using the OLS technique motivated this study to use the QR technique.
Before using the QR technique, the present study excluded outliers to see whether the
data would be normal; however, despite the exclusion of outliers, the results for normality
of the residuals through the Shapiro-Wilk W test show a p-value of o0.01, thereby rejecting
the null hypothesis that the residuals are normally distributed. Most importantly,
the practice of eliminating outliers from a set of regression model has been criticised by
econometric scholars as this process limits the generalisation of the findings, causes loss of
information and does not fulfil the objectives of the research (Hao and Naiman, 2007).
Therefore, the use of QR technique is more appropriate than the mean regression in
cases of heteroscedasticity and robustness to outliers as well as providing a
comprehensive picture of the effect. This is because the median estimator minimises
the symmetrically weighted sum of absolute errors to estimate the conditional median
function rather than minimising the sum of squared residual (errors) like the OLS model
Variable Mean Median SD Minimum Maximum
Explaining
IPO initial
IR 6.94 (14.42) 4.55 (5.07) 28.52 −78.44 96.67 (404.17) returns in
Offer price 0.86 0.70 0.65 0.15 4.55
IPORISK 1.79 1.43 1.19 21.97 6.67 Malaysia
Age 5.91 3.00 6.79 1.30 38.00
LNAGE 1.39 1.09 0.79 26.24 3.64
Total assets (millions) 424.26 71.07 2,174.49 64.76 29,336.07 87
LNTA 18.15 18.09 1.51 14.37 24.10
Z-score 1.99 1.82 0.98 0.18 6.71
Z_SCOD 0.24 0.00 0.43 0.00 1.00
UNDWR 0.44 0.00 0.49 0.00 1.00
AUDITQ 0.41 0.00 0.49 0.00 1.00
Gross proceeds (millions) 88.27 17.32 367.82 3.00 4,299.00
INVPRCD 0.07 0.06 0.06 0.00 0.33
HITECH 0.25 0.00 0.44 0.00 1.00
Notes: IR, initial returns; IPORISK, the reciprocal of IPO offer price; LNAGE, the natural logarithm of year of
establishment to the listing year; LNTA, the natural logarithm of pre-IPO total assets; Z_SCOD, is a binary
number of 1 for IPOs with Z-score less than 1.23, otherwise, 0; UNDWR, dummy variable of 1 for highly
reputable underwriter, otherwise 0; AUDITQ, a dummy variable of 1 for high-quality auditor, otherwise; 0; Table I.
INVPRCD, inverse of gross IPO proceeds; HITECH, a dummy variable of 1 for IPOs in the technology industry, Descriptive statistics
otherwise 0. The values in parenthesis is the initial returns data before excluding outliers for 220 IPOs of all the variables

(a) (b)
1
4

3 0.5
Quantiles of IR

Quantiles of IR

2
0

–0.5
0

–1 –1

0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 Figure 1.

Fraction of the data Fraction of the data
Quantile plot for
IPO initial returns
Notes: (a) With outliers; (b) without outliers

(Baum, 2013; Davino et al., 2013). In addition, there is no loss of degree of freedom, which is
important when the number of observations in the sample is not very large (Hao and
Naiman, 2007). Therefore, the QR technique addresses the weakness of OLS technique[4]
by providing a comprehensive view of the distribution of the dependent variable, which is
the initial return. The distribution is presented across different quantile functions
(e.g. 25th, 50th and 75th). With the QR, the current study can examine beyond the relative
average influence of the independent variables at different points of the distribution of the
dependent variable. The QR provides a more detailed and complete strategy for
completing the regression analysis. It is also a powerful tool for financial research and
risk modelling (Allen et al., 2009; Badru et al., 2017a, b; Raji et al., 2017).
ARA Based on the OLS and QR results, it is evident that IPORISK (measured by the reciprocal
26,1 of IPO offer price), company size, pre-IPO performance, type of industry (technology) and
audit quality are significantly related to IPO initial returns. However, changes exist in the
significance of the variables across quantiles. The IPORISK variable is positive and
significantly related to IPO initial returns in the OLS model. However, after eliminating the
outliers, IPORISK is positive and significantly related to IPO initial returns, implying that
88 cross-sectional differences are present in companies’ offer prices. By implication price is a
main factor in the supply and demand of IPO. However, company size is found to be positive
and significant until the median quantile level, suggesting that the size of the company can
only explain the level of initial returns to a certain level. In addition, the Z-score measure of
pre-IPO performance is negative and significantly related to initial returns using OLS
regression. It is also negative and significantly related to initial returns at the lower and
upper quantile levels using QR. The results indicate that IPOs with low pre-IPO
performance are likely to yield lower returns to investors. Similarly, when a continuous
rather than a binary value of 1 based on Altman Z-score measure is employed, a positive
relationship exists, which implies that IPOs with high pre-IPO performance are associated
with high initial returns. This evidence suggests that in contrast to Agathee et al. (2012)
where the pre-IPO performance is measured by Altman Z-score and is attributed to a proxy
for ex ante uncertainty, the Malaysian market perceives this as a signal of IPO quality
because quality issuers are significantly mispriced under the fixed price mechanism.
Interestingly, audit quality is significant and positively related at the upper quantile
level, which contradicts the assertion that audit quality reduces ex ante uncertainty and
leads to reduction in the level of initial returns. The positive relationship can be
interpreted as that audit quality in the Malaysian IPO market plays a signalling role.
This is consistent with Titman and Trueman’s (1986) argument that companies of high
value employ quality audit firms to audit their financial reports to distinguish them from
low-value companies. This is because low-value companies would find it difficult to
employ high-quality auditors because of high costs and because the information provided
by reputable auditors may likely be unfavourable. Technology-type IPO companies are
only significantly and negatively related until the median quantile level, indicating that
technology IPOs do not really yield the high level of initial returns as expected. All these
changes imply that proxies for ex ante uncertainty explanation for IPO initial returns
under the fixed price structure may produce different results. It also shows that using QR
is clearly needed because each quantile may be associated with a different impact. This
means that the explanation of IPO initial returns data that would have been unidentified
by OLS is identifiable with the use of QR, which means that estimating quantiles of IPO
initial returns data can well provide more insight than by just estimating the standard
OLS, which relates only to the conditional mean.
In general, the current study concludes that the ex ante uncertainty hypothesis may not
hold true in the Malaysian IPO market; it is the signalling effect that dominates. This could
be as a result of mispricing or because of the greater certainty and efficiency in the listing
process, such as imposition of various lock-up provisions, which reflect the behaviour of IPO
issuers. For example, unlike in the UK and the USA, where lock-up provisions are voluntary,
the imposition of lock-up provision has been made mandatory in the Malaysian IPO market.
This might reduce the uncertainty surrounding the IPO value.
A possibility also exists that issuers do not have the opportunity to factor in investors’
beliefs before setting the offer price because that price is set several days prior to the offer
closing for bidding. However, a possibility also exists that information about the aggregate
demand of investors which is crucial for determining the initial price at which the share will
trade in the secondary market leak and become public knowledge before investors finish
bidding for company shares. Thus, issuers deliberately set the offer price to be low to allow
investors to subscribe for more shares, knowing full well that the interest revenue on the Explaining
float of money paid by investors for unallocated shares prior to the allocation of shares IPO initial
would accrue to them. Thus, ex ante information may not be likely to explain IPO initial returns in
returns as investors become aware that the ex ante offer price is set too low. The implication
of this is that investors would rather consider these variables as signals of IPO quality Malaysia
rather than a proxy for ex ante uncertainty.
The findings also justify that the use of the fixed price offerings mechanism is preferable 89
for newly established and risky IPOs that may suffer from a greater degree of information
asymmetry because, while a strong demand is present for information about such
companies, the cost of producing such information is high. Hence, outsider information
production costs assist Malaysian IPO issuers to decrease valuation uncertainty and signal
their quality to reduce the level of initial returns attributable to investors. A clear indication
of this is that most variables are found to be highly significant in the lower quantile of the
QR technique. These findings further explain the changes in empirical regularities of IPO
studies over time not only to investors but also to financial managers as well as reveal the
unique nature of the Malaysian IPO market.
The remaining structure of the paper is as follows: Section 2 contains the theoretical
and empirical literature review, followed by the data and methods used in Section 3;
then, the results and discussion are provided in Section 4 and finally, the conclusion is
given in Section 5.

2. Theoretical explanation
A phenomenon associated with positive initial returns on the first trading day of IPO,
known as underpricing, has been widely documented in almost every financial market
across the world (Lowry et al., 2017; Banerjee et al., 2011; Engelen and van Essen, 2010;
Loughran et al., 1994). Regional and country-specific studies, include Moshirian et al. (2010)
for the IPOs of Asian countries; Adjasi et al. (2011) for Nigerian IPOs; Agathee et al. (2012)
for Mauritian IPOs; and Boonchuaymetta and Chuanrommanee (2013) for Thai IPOs. In line
with the prospect theory, Loughran and Ritter (2002) argue that issuers do not really get
upset about IPO underpricing, but rather are concerned with the impact of underpricing on
issuers’ wealth, i.e., the change in wealth rather than on the level of wealth, because the
amount of wealth loss or gain depends on the rate at which a share price increases.
Another argument from the investors and underwriter’s perspective is that the level at
which an IPO is underpriced determines the success of the IPO (Chemmanur, 1993;
Muscarella and Vetsuypens, 1989). Therefore, the common parties that do participate in the
IPO process are more concerned with the level at which an IPO is underpriced (Ritter and
Welch, 2002). In fact, argument by Allen and Faulhaber (1989), Grinblatt and Hwang (1989)
and Welch (1989) demonstrates that underpricing is used to signal the quality of the issuer.
By implication, the companies that underprice the IPO are likely to be high-quality issuers.
However, Ritter’s (1984) changing risk composition hypothesis suggests that IPOs that
are riskier are associated with a higher level of initial returns than less risky IPOs. The risk
reflects the valuation uncertainty because investors find it difficult to estimate the
company’s value. In view of this, underpricing arises as an equilibrium condition to induce
investors to participate in the IPO market.
Rock (1986) suggests that uninformed investors normally face higher ex ante uncertainty
because of the limited amount of information available to them prior to the IPO.
The information asymmetry creates a winner’s curse problem that discourages uninformed
investors to participate in the IPO. However, to encourage uninformed investors to
participate in the IPO, issuers deliberately underprice an IPO for continuous participation of
the uninformed investors because the informed ones cannot subscribe to all the issues.
Similarly, Beatty and Ritter (1986), in an extension of Rock’s (1986) model, claim that the
ARA level of information asymmetry that characterises an IPO tends to be associated with more
26,1 underpricing. As a result, Rock (1986) and Beatty and Ritter (1986) suggest that an
important avenue to respond to information asymmetry is by underpricing the IPO.
However, Ritter (2014) and Gao et al. (2013) have shown that a change exists in the costs and
benefits of going public, and these changes account for the reduction in the number of
companies going public in the twenty-first century. One cost is the increased pressure on
90 managers to pursue short-term rather than long-term objectives, which might reduce the
ex ante uncertainty surrounding an IPO (Lowry et al., 2017). Similarly, Gao et al. (2013) offer
an economics of scope argument that the decrease in the number of companies going public
is more concentrated among smaller offerings because smaller companies find it difficult to
operate in today’s rapidly changing environment. Thus, smaller companies find an
advantage of selling out to larger companies that have a broad network to develop and
speed their products to the market. Unlike what has occurred in the USA, changes in the
Malaysian capital market listing requirements encourage small and young companies to
raise capital through IPOs. Therefore, regulatory impacts may change the expectation of the
ex ante uncertainty hypothesis.

2.1 Prior empirical evidence on IPO initial returns

Several empirical findings with regard to ex ante uncertainty proxies and IPO initial returns
have been reported in the literature. However, because ex ante uncertainty is unobservable,
empirical literature has used several proxies to measure the ex ante uncertainty level of a
company. For instance, Beatty (1989) used audit quality as a proxy for ex ante uncertainty,
while Beatty and Ritter (1986) used gross proceeds and number of use of proceeds. In each
study’s context, the authors found evidence consistent with the predicted relationship
between initial returns and proxies for ex ante uncertainty. However, variations are present
in the significance of each variable.
The reciprocal of IPO offer price is a variable that is commonly used as a measure for
risk associated with each return on investment. A company’s level of risk reflects returns
attributable to investors. According to Bradley and Jordan (2002), the offer price of an IPO
can serve as a better measure of risk associated with an IPO because market influence on
the offer price is minimal because this is set prior to the IPO. In view of this, empirical
studies on Malaysian IPOs document that IPO risk measured as the reciprocal of IPO offer
price is positively associated with IPO underpricing (Abdul Rahim and Yong, 2010;
Rashid et al., 2014).
The operating history of a company is another measure of ex ante uncertainty
surrounding the IPO value. The assumption is that companies with short operating history
may not have detailed information or have little information in the public view for
prospective investors and analysts to value the company or make accurate forecasts about
prospects of the company. Therefore, younger companies are more likely to have high
ex ante uncertainty than older companies, resulting in a low level of IPO initial returns.
Ritter’s (1991) result shows a strong negative relationship between the age of the company
and IPO initial returns, which is consistent with the assumption that IPOs with limited
operating history are risky issues and associated with higher initial returns. Clarkson (1994)
found that initial returns and proxies for ex ante uncertainty are positively related. However,
a hierarchy of proxies exists. Specifically, company age is negatively related to IPO initial
returns. In contrast, Clarkson and Merkley (1994) did not find any significant relationship
between company age and initial returns.
Beatty and Ritter (1986) assume that the share prices of smaller companies are more
volatile and uncertain. Therefore, they propose that company size is negatively
associated with initial returns. Several studies in this regard report that company size is
negatively related to IPO initial returns (Chang et al., 2008; Nagata, 2013). In contrast,
Adjasi et al. (2011) and Ahmad-Zaluki and Kect (2012) found the reverse using Nigerian Explaining
and Malaysian data, respectively. Their results suggest that larger companies are IPO initial
associated with higher initial returns. returns in
Pre-IPO accounting information has also been considered as a proxy for IPO valuation
uncertainty because this information captures the financial strength of IPO companies. Malaysia
Studies such as those of Gumanti and Ariyanto (2005) and Almisher and Kish (2000) used
accounting β as proxy to measure ex ante uncertainty. They found a positive but 91
insignificant relationship between accounting β and IPO initial returns. However, Almisher,
Buell, and Kish (2002) used accounting β as a measure of systematic risk and found a
significant and positive relationship between accounting beta and the extent of IPO initial
returns. Agathee et al. (2012) used the Z-score as a composite measure of a company’s ex ante
financial strength and found a significantly negative relationship with IPO initial returns,
implying that IPOs with less financial strength attract a higher degree of ex ante uncertainty
than IPOs with higher financial strength. As such, the current study posits that IPOs with
less financial strength are positively related to IPO initial returns.
The reputation of financial intermediaries privileged to prior information about the IPO
can reduce the ex ante uncertainty of an IPO, thereby reducing the level of IPO initial
returns. Among these financial intermediaries are underwriters and auditors. These
financial intermediaries have more knowledge about the future prospects of the company,
which can reduce the uncertainty that remains unsolved in the prospectus, leading to a low
level of IPO initial returns (Titman and Trueman, 1986). Reputable underwriters are
associated with offers with a low level of ex ante uncertainty, while underwriters with a low
reputation are associated with offers with a high level of ex ante uncertainty (Beatty and
Ritter, 1986). Several studies (e.g. Beatty and Ritter, 1986; Beatty, 1989; Megginson and
Weiss, 1991) have found that IPOs with low initial returns are associated with reputable
underwriters. In contrast, Chang et al. (2008), Beatty and Welch (1996), Banerjee et al. (2011),
Boulton et al. (2010), Dimovski et al. (2011) and Hoberg (2007) found that underwriter’s
reputation is positively associated with IPO initial returns. Similar evidence is also
reported by Loughran and Ritter (2004), suggesting that reputable underwriters underprice
IPOs in an attempt to gain a larger market share. IPO underwriters make sure that
underpricing is commensurate with each IPO’s ex ante uncertainty to protect their
reputations in the market. For instance, empirical evidence by Hanley and Hoberg (2012)
on IPOs in the USA shows that underwriters have used IPO underpricing as a hedge against
litigation risk to retain their reputations in the market. Jones and us Swaleheen (2010)
indicate that companies that employ a reputable underwriter are more likely to experience a
greater demand at the time of the IPO, and are more likely to have higher underpricing in
order to protect their market share. Similarly, Roosenboom (2012) found that underwriters
deliberately discount the fair value estimate when setting the preliminary offer price.
Likewise, Clarkson (1994) found that underwriter’s reputation is positive, but insignificantly
related to IPO initial returns in the USA. In addition, Ammer and Ahmad-Zaluki (2016)
used underwriter’s market share as a measure of underwriter’s reputation and found
an insignificant and positive relationship between underwriter’s reputation and IPO
initial returns.
Apart from the role of underwriter’s reputation, audit quality also plays an informative
role in affecting IPO initial returns (Chang et al., 2008). Audit quality produces reliable and
precise financial reporting free from misrepresentation and misstatement that helps to
reduce ex ante uncertainty for uninformed investors, hence, leading to lower IPO initial
returns (Beatty, 1989). Therefore, the assumption is that quality auditors provide more
information that is useful to investors for assessing the value of the IPO; thus, the offer
prices of such companies are set high because uncertainty surrounding the IPO value is
reduced. As a company’s specific risk increases, high-quality auditors provide marginal
ARA benefits beyond those provided by low-quality auditors (Hogan, 1997). Therefore, audit
26,1 quality negatively influences the pricing of IPOs (Albring et al., 2007). Empirical studies in
this regard confirm that an inverse relationship exists between the quality of auditors and
IPO initial returns (Beatty, 1989; Hogan, 1997).
Beatty and Ritter (1986) and Clarkson (1994) used the inverse of IPO proceeds as ex ante
uncertainty and suggest that small IPOs are more likely to have greater initial returns.
92 The results show that the inverse of IPO proceeds is negatively related to IPO initial returns,
suggesting that a larger IPO is less risky than a smaller one. Pu and Wang (2015) observed a
similar finding using A-shares IPO data listed on the Shanghai Securities Exchange. These
findings suggest that companies with larger IPO proceeds can be regarded as low-risk IPOs,
while companies with small IPO proceeds are high-risk IPOs. Hence, a high-risk IPO is
anticipated to be associated with a high level of initial returns, consistent with the ex ante
uncertainty hypothesis.
Lowry et al. (2010) report a greater dispersion of initial returns when IPO companies are
mostly younger and technology companies. This evidence is consistent with that of Beatty
and Ritter (1986), Ritter (1991) and Lowry and Schwert (2004). In the case of IPO initial
returns in Malaysia, Ahmad-Zaluki and Kect (2012) found that a technology dummy has a
negative, but insignificant relationship with IPO initial returns.

3. Data and methods

3.1 Data
The main source of data collection is prospectuses. These are downloaded from the Bursa
Malaysia’s website. The prospectuses contain all the basic information needed to measure
all the variables (IPORISK, company age, company size, Z-score, underwriter’s reputation,
audit quality, inverse of gross IPO proceeds and the industry classification of the company)
used as measures of ex ante uncertainty of IPOs. All this information was manually
extracted from the prospectuses. The closing price of each IPO on the first trading day was
extracted from the DataStream database. The samples used in this study are IPOs listed on
the Bursa Malaysia from January 2005 to December 2015. Altogether the initial total number
of IPOs for this period was 301, but after excluding REITs, SPACs and close-ended funds
IPOs, the study arrived at a sample of 220 IPOs. The exclusion of these categories of IPOs is
in line with the argument of prior studies that the regulatory requirements of such IPOs are
different from the general population of the IPOs in the sample for this study (e.g. Ammer
and Ahmad-Zaluki, 2016; Abdul Rahim and Yong, 2010; Rashid et al., 2014).

3.2 Methods
Initial returns are estimated as the percentage difference between the pre-IPO offer and the
subsequent closing price on the first day of trading (Adjasi et al., 2011; Ahmad-Zaluki and
Kect, 2012; Moshirian et al., 2010). A positive value shows that an IPO is underpriced, and a
negative value indicates that an IPO is overpriced.
In order to test the ex ante uncertainty hypothesis, a multiple regression technique was
employed through the OLS regression and QR:
I Ri ¼ b0 þ b1 I PORI SK i þb2 LN AGE i þb3 LN TAi

þb4 Z _SCODi þb5 U N DW Ri þb6 AU DI TQi

þb7 I NV PRCDi þb8 H I TECH i þei (1)
In this model, IRi is the dependent variable and it represents initial returns. This is regressed
against all ex ante variables: the IPO risk (IPORISK) measured by the reciprocal of IPO offer
price; company age (LNAGE) measured as a natural logarithm of the year of establishment
to the listing date; company size (LNTA) measured as the pre-IPO total assets; and the Explaining
Z-score of pre-IPO performance (Z_SCOD), using a dummy variable of 1 for companies with IPO initial
an Altman Z-score of less than 1.23 and 0 if otherwise. The Z-score is estimated based on the returns in
model below:
Malaysia
Z i ¼ 0:717X 1i þ 0:847X 2i þ3:107X 3i þ0:420X 4i þ 0:998X 5i (2)
93
where Z is the overall financial performance of the company; X1 represents the net assets of
the company’s liquidity relative to total capitalisation, which is calculated as current assets
minus current liabilities scaled by total assets; X2 represents the total amount of reinvested
earnings calculated as retained earnings scaled by total assets; X3 represents the
productivity of the company’s assets calculated as earnings before interest and taxes
divided by total assets; X4 represents the gearing capacity of the company calculated as
book value of equity scaled by book value of liabilities; and X5 represents income-generating
ability and management capacity in dealing with competitive conditions. This is calculated
as sales divided by total assets.
Another variable is underwriter’s reputation (UNDWR), which represents a dichotomous
variable on the quality of the underwriter that certifies the issue. The underwriter’s
reputation is measured using a binary number of 1 for top five reputable underwriters, and 0
if otherwise. The top five reputable underwriters are measured through the Megginson and
Weiss’s (1991) method of identifying reputable underwriters based on their market share.
Following this method, five reputable underwriters based on their market share in terms of
IPO proceeds raised are: CIMB, AM Merchant Bank, Affin/Hwang Investment Berhad,
Maybank Securities and Alliance Merchant Bank.
Audit quality (AUDITQ) is also included in the model. It represents a dichotomous variable
for auditors who certify the financial statement, coming from either Big4 or non-Big4 audit
firms in Malaysia. This study uses Big4 audit firm as defined by Carlin et al. (2009) and
Lee and Ali (2008) in Malaysia, comprising PricewaterhouseCoopers, Klynveld Peat Marwick
Goerdeler (KPMG), Ernst & Young and DeloitteKassimChan.
Another two ex ante variables included in the model are the inverse of gross IPO
proceeds (INVPRCD) and industry type (HITECH), represented by a dummy variable of 1
for IPOs in the technology industry and 0 if otherwise.

4. Results
4.1 Descriptive statistics
Table I reports the descriptive statistics of all variables under study of the 208 IPO
companies for the sample period from 2005 to 2015. As can be seen from the table, the mean
initial return is 7 per cent, indicating that investors who buy IPO shares at offer price and
sell them at the end of the closing day on the first day of trading can earn a 7 per cent return
on average. This return is far below what has been previously reported by prior studies,
such as Ammer and Ahmad-Zaluki (2016) that used a sample of IPOs listed from the years
2002-2014 and documented an average level of initial return of 21 per cent. This indicates
that an average level of initial returns in the Malaysian IPO market is now comparable to
what is obtainable in the developed markets, like the USA, which is between 10 and
25 per cent (e.g. Boulton et al., 2011; Engelen and van Essen, 2010); the UK (20 per cent);
and France (13 per cent), among others (e.g. Boulton et al., 2010, 2011).
The table indicates that the average age at which a company goes for an IPO in Malaysia
is six years, while the maximum age is 38 years. In addition, companies raise as high as
RM4,229 million during an IPO and as low as RM3 million during an IPO sale. The average
Z-score (1.99) is above the standard rule of thumb of Altman (2000) Z-score model (1.23).
ARA The maximum total assets of the IPO sample is RM29,336.07 million, and the average is
26,1 RM424.26 million.
Table II shows the Pearson correlation analysis among the variables. Based on the
results presented in the table, IPORISK is significant and positively correlated with IPO
initial returns. Similarly, the pre-IPO performance (Z-SCOD), underwriter’s reputation
(UNDWR) and audit quality (AUDITQ) are all significant and positively correlated to
94 company size. However, the inverse of gross IPO proceeds (INVPRCD) and technology
industry (HITECH) are negative and significantly correlated to company size (LNTA).
This may imply that such IPO companies in the technology sector (HITECH) are likely to
be of small size with a smaller amount of IPO proceeds. Interestingly, a positive correlation
is found between inverse of gross IPO proceeds and IPORISK as well as HITECH
and IPORISK, which indicates that companies raising large amounts of capital tend to be
highly risky and companies that belong to the technology sector are categorised as
risky companies. Therefore, the expectation is that a reputable underwriter and audit
quality should mitigate the risk or uncertainty associated with such IPOs. Notably,
the correlation results show that underwriter’s reputation and audit quality are negatively
correlated to IPORISK.

4.2 Regression results and discussion

Prior studies have not considered the normality of the stock market data, in this case, IPO
initial returns data. For instance, Rashid et al. (2014) indicate that their test for normality
rejects the hypothesis that their data are normally distributed. To buttress their point, the
authors argue that Brooks (2014) and Stevens (2012) note that extreme values are normally
common in financial data; thus, the violation of the assumption of normality does not
undermine the reliability of the estimated coefficients when a large sample is used. This is
because the central limit theorem indicates that the sum of an independent observation having
any distribution whatsoever approaches a normal distribution as the number of observations
increases. However, an accurate number determining a large sample is quite ambiguous.
Taking this into consideration, this study used a sophisticated regression technique, known
as QR introduced by Koenker and Basset (1978) in addition to OLS regression.
The QR technique takes into consideration the non-normality of the data by
transforming the conditional distribution function into a conditional quantile function and
placing data on various segments (e.g. 25th, 50th and 75th) (Badru et al., 2017a, b; Hao and

IR IPORISK LNAGE LNTA Z_SCOD UNDWR AUDITQ INVPRCD

IR 1.00
IPORISK 0.27*** 1.00
LNAGE 0.03 −0.14** 1.00
LNTA 0.09 −0.45*** 0.34*** 1.00
Z_SCOD −0.07 −0.09 0.18*** 0.39*** 1.00
UNDWR −0.07 −0.28*** 0.16** 0.27*** 0.15** 1.00
AUDITQ 0.06 −0.15** 0.07 0.27*** 0.23*** 0.08 1.00
INVPRCD 0.01 0.36*** −0.11 −0.59*** −0.09 −0.27*** −0.14** 1.00
HITECH −0.14 0.25*** −0.16*** −0.52*** −0.20*** −0.13** −0.10 0.23***
Notes: IPORISK, the reciprocal of IPO offer price; LNAGE, natural logarithm of year of establishment to the
listing year; LNTA, natural logarithm of pre-IPO total assets; Z_SCOD, binary number of 1 for IPOs with
Z-score less than 1.23, otherwise 0; UNDWR, dummy variable of 1 for high reputable underwriter, otherwise 0;
AUDITQ, dummy variable of 1 for high-quality auditor, otherwise 0; INVPRCD, the inverse of gross IPO
Table II. proceeds; HITECH, a dummy variable of 1 for IPOs in the technology industry, otherwise, 0. **,***Significant
Correlation results at the 5 and 1 per cent levels, respectively
Naiman, 2007; Koenker and Hallock, 2001; Raji et al., 2017). This allows the study to examine Explaining
beyond the relative average influence of the independent variables at different points of the IPO initial
distribution of the dependent variable. returns in
Figure 1 (a) and (b) show different quantiles of IPO initial returns data. While Figure 1(a)
shows the initial returns before eliminating outliers, Figure 1(b) shows the graph of quantiles Malaysia
of initial returns after the elimination of outliers. Both figures show that the amount of IPO
initial returns varies. For example, in Figure 1(a), the maximum amount of IPO initial returns 95
is around 400 per cent, while in Figure 1(b), the maximum amount is around 100 per cent.
Therefore, relying on the use of OLS, which is explained based on the conditional mean, could
be misleading. This is evidenced in Table III.
Table III presents the OLS and QR results for all the IPOs before eliminating outliers.
Based on the results presented in this table, it is very clear that estimating only the
conditional mean of IPO initial returns data can be inappropriate when the regression
technique employed is the OLS technique. Although the robust OLS results reported in
Table III provide better results than OLS by showing that LNTA and Z_SCOD in addition to
IPORISK are significantly related to IPO initial returns, the robust OLS estimate must still
be interpreted based on the conditional mean. The QR shows that the relationship between
the ex ante uncertainty variable and IPO initial returns differs across quantiles.
To show this, the effects of all quantiles are visualised in Figure 2(a) and (b). These
figures plot the coefficient of each variable along the vertical axis and the quantiles along
the horizontal axis. The shaded areas indicate the 95 per cent confidence interval for the QR
estimates. The thick line in the middle of the shaded area reflects the coefficient estimate of
QR in different quantiles. Similarly, the dotted line in each graph indicates the OLS estimate
of the conditional mean effect. In the graphs depicted in Figures 2(a) and (b), the OLS
coefficient line does not vary and is assumed to be constant, while the quantile coefficient
line varies. This clearly shows how the lower and upper quantiles of IPORISK, Z_SCOD and
LNTA differ from the OLS. For example, the IPORISK coefficient is significantly lower than
OLS in the 25th-75th quantiles and Z_SCOD is lower in the 25th quantile, while LNTA is

QR
OLS Robust OLS 25th 50th 75th

IPORISK 7.67*** 5.73*** 6.38*** 6.80*** 6.44***

LNAGE −0.65 −0.18 0.56 0.83 −1.08
LNTA 1.62 3.01** 3.54*** 1.65 1.75*
Z_SCOD −0.25 −2.66*** −4.14*** −0.92 −1.15
UNDWR 0.46 −0.13 −1.19 −0.15 0.07
AUDITQ 1.41 0.48 0.93 0.17 1.42
INVPRCD −0.11 0.39 0.93 0.17 1.42
HITECH −1.42 −1.44 −3.44*** −2.12** −0.39
Constant −1.90* −3.07*** −2.71*** −1.85* −1.60
R2 (%) 24
Adjusted R2 (%) 21
Pseudo R2 (%) 11 6 10
Number of companies 220 220 220 220 220
Notes: IPORISK, the reciprocal of IPO offer price; LNAGE, the natural logarithm of year of establishment to
the listing year; LNTA, the natural logarithm of pre-IPO total assets; Z-SCOD, a binary number of 1 for IPOs
with Z-score less than 1.23, otherwise, 0; UNDWR, a dummy variable of 1 for high reputable underwriter, Table III.
otherwise, 0; AUDITQ, a dummy variable of 1 for high-quality auditor, otherwise, 0; HITECH, a dummy OLS and Quantile
variable of 1 for IPOs in the technology industry, otherwise, 0; and INVPROD, is the inverse of gross IPO regression results
proceeds. **,***Significant at the 5 and 1 per cent levels, respectively (with outliers)
ARA above OLS in the 25th quantile. These differences help to better understand the explanation
26,1 of IPO initial returns which cannot be obtained through the OLS.
Further comparison of the results in Table III is presented in Table IV, which suggests
that relying on the OLS technique to estimate the relationship between ex ante uncertainty

96 (a)
0.80 0.20
0.00
0.60 0.00

IPORISK
Intercept

LNAGE
0.40 –0.20
–5.00
0.20 –0.40

–10.00 0.00 –0.60

0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
Quantile Quantile Quantile

0.60 1.00
1.00
0.40 0.50
Z_SCOD

0.50

UDWR
LNTA

0.20 0.00
0.00
0.00 –0.50

–0.20 –0.50 –1.00

0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
Quantile Quantile Quantile

1.00 1.00
1.00
0.50
INVPRCD

5.00
AUDITQ

HITECH
0.50
0.00
0.00 0.00
–0.50

–0.50 –5.00 –1.00

0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
Quantile Quantile Quantile

(b)
2.00 0.20
0.10

0.00 0.15 0.00

IPORISK
Intercept

LNAGE

–2.00 0.10 –0.10

–4.00 0.05 –0.20

–6.00 0.00 –0.30

0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
Quantile Quantile Quantile

0.30 0.20 0.40

0.20 0.00 0.20

Z_SCOD

UDWR
LNTA

0.10 –0.20 0.00

0.00 –0.40 –0.20

–0.10 –0.60 –0.40

0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
Quantile Quantile Quantile

0.60 6.00 0.20

0.40 4.00
INVPRCD
AUDITQ

HITECH

0.00
0.20 2.00

Figure 2. 0.00 0.00

–0.20

Estimated coefficient –2.00 –0.40

–0.20
for all variables
0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
used in the Quantile Quantile Quantile
regression analysis
Notes: (a) Before eliminating outliers; (b) after eliminating outliers
 QR
Explaining
OLS 25th 50th 75th VIF TF IPO initial
returns in
IPORISK 5.50*** 3.78*** 6.13*** 4.90*** 2.80 0.36
LNAGE 0.07 0.52 1.09 −0.75 1.66 0.60 Malaysia
LNTA 2.69*** 2.46*** 1.99** 1.31 1.40 0.71
Z_SCOD −2.65*** −3.04*** −1.19 −2.07** 1.34 0.75
UNDWR −0.31 −1.15 −0.59 0.30 1.28 0.78 97
AUDITQ 1.25 0.96 0.34 2.24** 1.16 0.87
INVPRCD 0.54 −0.47 −0.95 1.10 1.15 0.87
HITECH −1.72 −2.70*** −2.04*** −0.64 1.11 0.90
Constant −2.80*** −2.71*** −2.17*** −1.11
2
R (%) 17
Adjusted R2 (%) 14
Pseudo R2 (%) 13 6 10
Mean VIF 1.49
Number of companies 208 208 208 208
Notes: IPORISK, the reciprocal of IPO offer price; LNAGE, the natural logarithm of year of establishment to
the listing year; LNTA, the natural logarithm of pre-IPO total assets; Z-SCOD, a binary number of 1 for IPOs
with Z-score less than 1.23, otherwise, 0; UNDWR, a dummy variable of 1 for high reputable underwriter, Table IV.
otherwise, 0; AUDITQ, a dummy variable of 1 for high-quality auditor, otherwise, 0; HITECH , a dummy OLS and quantile
variable of 1 for IPOs in the technology industry, otherwise, 0; and INVPROD, the inverse of gross IPO regression results
proceeds. **,***Significant at the 5 and 1 per cent levels, respectively (without outliers)

variables and IPO initial returns is unreliable as this relationship might be distorted due the
presence of outliers in the sample.
Table IV shows the results of the OLS and QR after eliminating outliers[5]. However,
since the essence of the QR is to provide a comprehensive picture of the relationship,
the results are interpreted based on Table III.
A look at the OLS results indicates that IPORISK and LNTA are significant and positively
related to initial returns. While IPORISK is significant at the 1 per cent level in OLS and across
quantiles, the LNTA is significant at 1 per cent on average and the lower quantile level (25th)
and significant at the 5 per cent in the median quantile level (50th). The significance of the
IPORISK variable implies that there is a cross-sectional variation in companies’ share price
and the trade-off hypothesis between risks and returns exist in the context of the Malaysian
IPO market because the offer price of an IPO is directly related to the initial returns of the IPO.
This offer price plays a significant role in the initial performance of an IPO and serves as a
proxy for uncertainty and total information costs incurred to achieve secondary market
liquidity (Booth and Chua, 1996). Thus, the reciprocal of offer price can be considered to be a
strong reflection of risks surrounding the IPOs (Bradley and Jordan, 2002; Jenkinson and
Ljungqvist, 2001). This implies that risky IPOs would have greater incentives than less risky
IPOs to issue their shares at lower prices and that issuers use a lower offer price to signal their
quality with the aim of attracting sufficient subscriptions from investors. On the other hand,
an increase in offer price signals less uncertainty and results in lower initial returns. Pu and
Wang (2015) indicate that such IPOs with lower offer price are highly underpriced, thereby
providing more returns to investors on the first trading day. This result is consistent with
findings from prior IPO studies, such as Willenborg (1999) in the USA; and other prior IPO
studies in the Malaysian context (e.g. Abdul Rahim and Yong, 2010; Rashid et al., 2014).
This suggests that the price of an IPO is a useful investment signal, and investors in the
Malaysian IPO market can use this to foresee the initial returns.
However, contrary to the ex ante uncertainty hypothesis that small IPOs tend to have
more ex ante uncertainty, the result in Table III shows that company size is positive and
ARA significantly related to IPO initial returns, implying that company size is a proxy for
26,1 signalling rather than ex ante uncertainty of the company. The result is consistent with prior
IPO studies, such as Adjasi et al. (2011) in the Nigerian IPO market and Ahmad-Zaluki and
Kect (2012) in the Malaysian IPO market, but contrast with the study of Chang et al. (2008)
in the Australian IPO market.
The implication is that larger companies are associated with a higher level of IPO initial
98 returns; thus, the larger the company size, the higher the IPO initial returns. Thus, one can
argue that large Malaysian companies have the capacity to allow investors to enjoy high
initial returns to signal their superiority over smaller companies. This further shows to
investors the prospect of these types of companies’ future cash flows. On the other hand,
because typical Malaysian IPO companies are not as big as the so-called big companies in
developed markets, the positive relationship is not surprising because, since 2005,
the regulatory structure in the Malaysian IPO market has encouraged young companies to
use an IPO as a means of raising capital. Therefore, the information production costs may be
high, and this cost may be related to the risky nature of the company.
In addition, a significant and negative relationship is found between Z_SCOD and
average level of initial returns, lower quantile (25th) and upper quantile (75th) levels. This
significance of Z_SCOD is much stronger on average and at the lower quantile at 1 per cent,
but becomes 5 per cent in the upper quantile level. This indicates that IPOs with poor
pre-IPO performance, on average, are underpriced less. These results contradict the findings
of Agathee et al. (2012) that financially strong IPOs underprice less as compared to IPOs
with weak financial performance vice versa. Using the Z-score as a proxy for ex ante
uncertainty may be unsuitable in the Malaysian context; rather, it can be considered a
signalling proxy. Thus, IPOs with poor pre-IPO performance may be of low-quality and may
not have the ability to mimic high-quality companies. Hence, such types of IPOs may find it
difficult to signal their quality through underpricing. In addition, such types of IPOs are more
likely to have strong economic motives to engage in financial fraud (Hasnan et al., 2013).
In fact, this might have been one of the main motives for the practice of earnings management
in the Malaysian market.
Furthermore, AUDITQ is found to be significant and positively associated with initial
returns only at the upper quantile level at 5 per cent. Interestingly, the sign of audit quality
is found to be positive. Although this contradicts the signalling theory and other prior
empirical studies on IPOs (Beatty, 1989; Hogan, 1997), the current finding is consistent with
Chang et al. (2008) that found a positive relationship between audit quality and IPO initial
returns in the Australian setting. In fact, the sign is also consistent with Clarkson’s (1994)
empirical study in the USA.
Some possible explanations could relate to the fact that a trade-off exists between the
benefits and costs of employing an auditor. Feltham et al. (1991) empirically tested
Datar et al. (1991) proposition that audit quality increases client-specific risk; they found no
strong support for an association between client-specific risk and audit quality. Therefore,
they argue that if a quality auditor charges more than what the risk premium is likely to be,
the incremental costs of employing a quality auditor may outweigh the cost of choosing a
high-quality auditor. As a result, Hogan (1997) suggests a non-linear relationship
between audit quality and client-specific risk. This also contradicts the findings of Fan and
Wong (2005) on the role of external auditors in the East Asian markets, where they found
that companies in emerging East Asia hire high-quality auditors and such companies
receive smaller share price discounts associated with agency conflicts. This suggests that
audit quality may influence the price of an IPO and serve as a signalling device, consistent
with signalling theory.
Finally, the results show that HITECH is only significant and negatively related to IPO
initial returns in the lower and median quantile levels at 1 per cent, whereas it is
insignificant in the OLS and upper quantile level. The results indicate that technology is not Explaining
a proxy for ex ante uncertainty of the company. This means that IPOs in this category IPO initial
yield less returns rather than higher returns as expected. This result is consistent with returns in
Ahmad-Zaluki and Kect’s (2012) finding that technology dummy is negatively related to IPO
initial returns, but insignificant. However, in the current study, a significant and negative Malaysia
relationship is reported, meaning that the average value to explain the relationship of an
explanatory variable to the response variable may not present a more comprehensive 99
picture of the relationship.
Although technology companies have become increasingly important in the Malaysian
capital market, the sign of technology dummy in relationship to IPO initial returns in
Malaysia suggests that so-called technology companies in the Malaysian IPO market cannot
be compared to the technology companies in developed markets. A typical example is the
findings of Badru et al. (2016), who documented that most technology companies do not
invest in research and development (R&D), thereby limiting the higher uncertainty of future
cash flows that may be expected from investments in R&D. Moreover, investment in R&D is
expected to be positively associated with higher expected stock returns (Hsu, 2013).
In addition, the investment climate in the Malaysian capital market is transparent
because issuers are mandated to provide information on growth opportunities and the
associated risks surrounding the investment. This reduces the information opaqueness
commonly attributed to technology companies and litigation risks that may arise from
information asymmetry (Francis et al., 2012). Furthermore, most of the sampled companies
seeking listing on the main market of Bursa Malaysia and the securities market regulation
indicate that they are established companies with little or no growth opportunities. Hence,
the negative relationship found between the technology dummy and IPO initial returns in
the Malaysian IPO market is unsurprising because these companies are less likely to be
surrounded by valuation uncertainty.
However, the current study does not find a relationship between company age,
underwriter’s reputation, inverse of gross IPO proceeds and IPO initial returns.
The insignificance of company age is consistent with the argument of Roosenboom (2012),
that company age, as a proxy for ex ante uncertainty, is not an indicator of price discount
level, meaning that the price discount is not used to compensate investors for risk.
The results also indicate that underwriter’s reputation does not explain IPO initial returns
in Malaysia. The insignificant result of that inverse of gross IPO proceeds and initial
returns suggests that it may not be a suitable proxy for valuation uncertainty (Habib and
Ljungqvist, 1998). This means that IPO proceeds are positively correlated with the
number of issued shares, but the aftermarket price is negatively correlated with the same
number due to dilution.
Overall, the results of this current study contradict the proposition that underpriced
offerings are subject to ex ante uncertainty surrounding the valuation of the company.
This could be because of the pricing mechanisms employed in the Malaysian IPO market,
where issuers may not have the opportunity to factor in the private valuation of potential
investors on new offerings unlike what is obtainable in developed capital markets where the
book-building and auction methods are used in setting an offer price. Therefore, the offer
price set by most companies in the Malaysian IPO market may not reflect private
information about the company from investors, and this could result in little or no
explanation of the role of ex ante information on IPO initial returns in the Malaysian IPO
market. Similarly, because investors are unlikely to have opportunity to reveal their private
valuation about the company in the pre-market period, information asymmetry tends to be
high, and issuers would find various means to signal their quality. Therefore, the findings in
this study reveal that other than IPORISK, other significant proxies of ex ante uncertainty
can simply be interpreted as signals of the company’s quality in the Malaysian IPO market.
ARA 4.3 Robustness check
26,1 To confirm that Altman Z-score plays a signalling role in the Malaysian IPO market, Table V
shows the regression results based on a continuous measure of Altman Z-score rather than a
binary value of 1 for IPOs with Z-score less than 1.23, otherwise, 0. The continuous measure
allows this study to conclude that Altman Z-score model is a signal of IPO issuers’ quality.
This evidence is consistent with prior IPO studies that have found that pre-IPO
100 performance has a positive influence on IPO initial returns. For instance, Gasbarro et al. (2003)
report that underpricing is positively related to pre-IPO cash flow and sales, indicating that
IPOs with strong financial strength would underprice their issues higher than IPOs with weak
financial strength. Similarly, Beckman et al. (2001) document that IPOs with good financial
health, measured by cash coverage ratio, are more underpriced than non-healthy IPOs, which
is an indication that IPO companies have more stable earnings. These results are consistent
with the prediction of the signalling theory that IPO underpricing is considered as a signal of a
company’s quality (Allen and Faulhaber, 1989; Grinblatt and Hwang, 1989; Welch, 1989).

5. Conclusion
In this study, two competing theories of IPO initial returns are tested: the ex ante uncertainty
hypothesis and signalling theory. The assumption of the ex ante uncertainty hypothesis is
that IPOs with a high ex ante uncertainty are associated with a higher level of initial returns.
In contrast, the signalling theory suggests that underpricing signals the company’s quality.
To test these theoretical assumptions, the current study used a sample of 220 Malaysian
IPOs listed on Bursa Malaysia. The proxies employed are IPORISK (measured by the
reciprocal of IPO offer price), company size, company age, Altman Z-score measure of
pre-IPO performance, inverse of gross IPO proceeds and industry type (technology vs
non-technology). The current study also considered other influences, such as the
underwriter’s reputation and audit quality.
To test the support for the hypotheses under study, the current study applied the QR
technique in addition to the OLS. The results of the current study show no clear evidence
that the ex ante uncertainty hypothesis holds true in the Malaysian IPO market, only that

QR
OLS Robust OLS 25th 50th 75th

IPORISK 7.85*** 3.32*** 3.34*** 9.15*** 5.28***

LNAGE −0.68 −0.79 0.27 0.43 −0.76
LNTA 1.96** 2.13** 1.51 2.97*** 1.39
Z_SCOD 1.26 1.69* 2.16** 2.41** 1.46
UNDWR 0.49 0.52 −0.93 0.31 0.37
AUDITQ 1.50 1.35 0.89 0.30 1.06
INVPRCD −0.05 −0.05 −1.08 −0.70 0.40
HITECH −1.37 −1.33 −3.04*** −2.16** −0.69
Constant −2.27** −2.36** −1.81* −3.35*** −1.43
R2 (%) 24
Adjusted R2 (%) 21
Pseudo R2 (%) 10 7 11
Number of companies 220 220 220 220 220
Notes: IPORISK, the reciprocal of IPO offer price; LNAGE, the natural logarithm of year of establishment to
Table V. the listing year; LNTA, the natural logarithm of pre-IPO total assets; Z-SCOD, a continuous value based on
OLS and Quantile Altman Z-score model; UNDWR, a dummy variable of 1 for high reputable underwriter, otherwise, 0;
regression results AUDITQ, a dummy variable of 1 for high-quality auditor, otherwise, 0; HITECH, a dummy variable of 1 for
(using a continuous IPOs in the technology industry, otherwise, 0; and INVPROD, the inverse of gross IPO proceeds.
measure of Z-score) *,**,***Significant at the 10, 5 and 1 per cent levels, respectively
certain pre-IPO information has predictive power in explaining IPO initial returns. Explaining
Specifically, rather than using the Z-score as a proxy for ex ante uncertainty surrounding the IPO initial
IPO, the Z-score provides a direct link as a signal of the company’s quality. These finding returns in
provide a new understanding on the market for IPOs. Moreover, the perception that a
technology company is associated with uncertain future cash flow is unrealistic in the Malaysia
Malaysian IPO market as most of these technology companies are listed in the main market,
which is known as a market for established and companies with lower growth opportunities 101
that could warranty uncertainty in the future cash flow of investment opportunities.
In addition, it is also evident that the results may be driven by outliers in the sample.
Therefore, the QR technique used in this study allows testing and establishing that results
provided without the exclusion of outliers may produce different results compared to when
outliers are excluded. A takeaway from this is that relying on financial data without proper
diagnostic tests or a more sophisticated technique may produce qualitatively different
results and lead to misinterpretation of the findings.
Another major concern of the current study is the drastic reduction in the level of IPO
initial returns, which is 7 per cent. This contradicts prior studies on IPOs in Malaysia, like
Abdul Rahim et al. (2012), that documented average initial returns of 31 per cent for a sample
of IPOs from 1999 to 2008 and Ammer and Ahmad-Zaluki (2016) that reported average initial
returns of 21 per cent for a sample of IPOs between 2002 and 2012. This may imply that the
Malaysian market is moving towards an efficient market and that issuers are now more
concerned with how to maximise the proceeds from an IPO sale. This increases the chance for
the company to fuel corporate growth and income generation, thus leading to greater national
income and economic growth. Finally, the regression model only explained 14 per cent of the
variation in IPO initial returns, indicating a need for future studies to include variables that
relate to information disclosed in the prospectus, in particular, the use of IPO proceeds and
risk factor disclosure may provide a better explanation of IPO initial returns.

Notes
1. Common proxies used can be categorised into four groups, namely, company characteristics
(e.g. age, size and industry); offering characteristics (e.g. offer price, gross proceeds); prospectus
disclosure (e.g. use of proceeds and risk factor disclosure); and aftermarket variables (e.g. trading
volume or volatility) (Ljungqvist, 2007).
2. The new guidelines introduced on 30 November 2004 reviewed the PN 4/2001 and PN 10/2001
with the PN 17/2005 framework to enhance the quality of companies listed on Bursa Malaysia
(Ong et al., 2011).
3. “PM Najib’s keynote address at Invest Malaysia Kuala Lumpur”, 25 July, 2017, available at:
www.theedgemarkets.com/article/pm-najibs-keynote-address-invest-malaysia-kuala-lumpur
4. This technique is unable to capture the shape shifts caused by changes in the covariates and to
detect multiple forms of shape shifts.
5. Outliers are being eliminated following DFFITS statistics proposed by Belsley et al. (1980), and
advanced by Belsley (1991), using Stata software as suggested by Baum (2006).

References
Abdul Rahim, R. and Yong, O. (2010), “Initial returns of Malaysian IPOs and Shari’a-compliant status”,
Journal of Islamic Accounting and Business Research, Vol. 1 No. 1, pp. 60-74.
Abdul Rahim, R., Che Embi, N.A. and Yong, O. (2012), “Winner’s curse and IPO initial performance:
new evidence from Malaysia”, International Journal of Business and Management Studies, Vol. 4
No. 2, pp. 151-159.
ARA Adjasi, C.K., Osei, K.A. and Fiawoyife, E.U. (2011), “Explaining underpricing of IPOs in frontier
26,1 markets: evidence from the Nigeria Stock Exchange”, Research in International Business and
Finance, Vol. 25 No. 3, pp. 255-265.
Agathee, U.S., Sannassee, R.V. and Brooks, C. (2012), “The underpricing of IPOs on the stock exchange
of Mauritius”, Research in International Business and Finance, Vol. 26 No. 2, pp. 281-303.
Ahmad-Zaluki, N.A. and Kect, L.B. (2012), “The investment performance of MESDAQ market initial
public offerings (IPOs)”, Asian Academy of Management Journal of Accounting and Finance,
102 Vol. 8 No. 1, pp. 1-23.
Albring, S.M., Elder, R.J. and Zhou, J. (2007), “IPO underpricing and audit quality differentiation within
Non-Big 5 firms”, International Journal of Auditing, Vol. 11 No. 2, pp. 115-131.
Allen, D.E., Gerrans, P., Singh, A.K. and Powell, R. (2009), “Quantile regression: its application in
investment analysis”, JASSA, No. 4, pp. 7-12.
Allen, F. and Faulhaber, G.R. (1989), “Signalling by underpricing in the IPO market”, Journal of
Financial Economics, Vol. 23 No. 2, pp. 303-323.
Almisher, M.A. and Kish, R.J. (2000), “Accounting betas – an ex ante proxy for risk within the IPO
market”, Journal of Financial and Strategic Decisions, Vol. 13 No. 3, pp. 23-34.
Almisher, M.A., Buell, S.G. and Kish, R.J. (2002), “The relationship between systematic risk and
underpricing of the IPO market”, in Kensinger, J. (Ed.) Research in Finance, Vol. 19, Emerald
Group Publishing Limited, Bingley, pp. 87-107.
Altman, E.I. (1993), Corporate Financial Distress and Bankruptcy, 2nd ed., Wiley, New York, NY.
Altman, E.I. (2000), Predicting Financial Distress of Companies: Revisiting the Z-score and ZETA
Models, working paper, Stern School of Business, New York University, available at: http://
lemeunier.gilbert.free.fr/Investissement/DOCS/PDF/Zscores.pdf (accessed 25 June 2016).
Ammer, M.A. and Ahmad-Zaluki, N.A. (2016), “The effect of underwriter’s market share, spread and
management earnings forecasts bias and accuracy on underpricing of Malaysian IPOs”,
International Journal of Managerial Finance, Vol. 12 No. 3, pp. 1-26.
Asyiqin, W.A., Razali, W.M. and Arshad, R. (2014), “Disclosure of corporate governance structure
and the likelihood of fraudulent financial reporting”, Procedia-Social and Behavioral Sciences,
Vol. 145, pp. 243-253.
Badru, O.B., Ahmad Zaluki, N.A. and Wan Hussin, W.N. (2016), “Disclosure of intended use of IPO”,
Proceedings of 4th International Conference on Accounting, Business & Economics (ICABEC),
School of Maritime Business and Management, University Malaysia Terengganu, 28-30 August,
available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3010033
Badru, B.O., Ahmad-Zaluki, N.A. and Wan-Hussin, W.N. (2017a), “Board characteristics and the
amount of capital raised in the Malaysian IPO market”, Journal of Multinational Financial
Management, Vols 42-43, pp. 37-55.
Badru, B.O., Ahmad-Zaluki, N.A. and Wan-Hussin, W.N. (2017b), “CEO characteristics and the amount
of capital raised in Malaysian IPOs”, International Journal of Management Practice, Vol. 10 No. 4,
pp. 327-360.
Banerjee, S., Dai, L. and Shrestha, K. (2011), “Cross-country IPOs: what explains differences in
underpricing?”, Journal of Corporate Finance, Vol. 17 No. 5, pp. 1289-1305.
Baum, C.F. (2006), An Introduction to Modern Econometrics Using Stata, Stata Press, State College, PA.
Baum, C.F. (2013), “Quantile regression”, available at: http://fmwww.bc.edu/EC-C/S2013/823/EC823.S20
13.nn04.slides.pdf (accessed 16 January 2016).
Beatty, R.P. (1989), “Auditor reputation and the pricing of initial public offerings”, Accounting Review,
Vol. 64 No. 4, pp. 693-709.
Beatty, R.P. and Ritter, J.R. (1986), “Investment banking, reputation, and the underpricing of initial
public offerings”, Journal of Financial Economics, Vol. 15 No. 1, pp. 213-232.
Beatty, R.P. and Welch, I. (1996), “Issuer expenses and legal liability in initial public offerings”,
The Journal of Law and Economics, Vol. 39 No. 2, pp. 545-602.
Beckman, J., Garner, J., Marshall, B. and Okamura, H. (2001), “The influence of underwriter reputation, Explaining
keiretsu affiliation, and financial health on the underpricing of Japanese IPOs”, Pacific-Basin IPO initial
Finance Journal, Vol. 9 No. 5, pp. 513-534.
returns in
Belsley, D.A. (1991), Conditioning Diagnostics, John Wiley & Sons, Inc., Hoboken, NJ.
Malaysia
Belsley, D.A., Kuh, E. and Welsch, R.E. (1980), Regression Diagnostics: Identifying Influential Data and
Sources of Collinearity, John Wiley & Sons, Inc., Hoboken, NJ.
Bhabra, H.S. and Pettway, R.H. (2003), “IPO prospectus information and subsequent performance”, 103
Financial Review, Vol. 38 No. 3, pp. 369-397.
Boonchuaymetta, E. and Chuanrommanee, W. (2013), “Management of the IPO performance in
Thailand”, Journal of Multinational Financial Management, Vol. 23 No. 4, pp. 272-284.
Booth, J.R. and Chua, L. (1996), “Ownership dispersion, costly information, and IPO underpricing”,
Journal of Financial Economics, Vol. 41 No. 2, pp. 291-310.
Boulton, T.J., Smart, S.B. and Zutter, C.J. (2010), “IPO underpricing and international corporate
governance”, Journal of International Business Studies, Vol. 41 No. 2, pp. 206-222.
Boulton, T.J., Smart, S.B. and Zutter, C.J. (2011), “Earnings quality and international IPO underpricing”,
Accounting Review, Vol. 86 No. 2, pp. 483-505.
Bradley, D.J. and Jordan, B.D. (2002), “Partial adjustment to public information and IPO underpricing”,
Journal of Financial and Quantitative Analysis, Vol. 37 No. 4, pp. 595-616.
Brooks, C. (2014), Introductory Econometrics for Finance, 2nd ed., Cambridge University Press,
Cambridge.
Carlin, T.M., Finch, N. and Laili, H.N. (2009), “Investigating audit quality among Big 4 Malaysian
firms”, Asian Review of Accounting, Vol. 17 No. 2, pp. 96-114.
Chang, X., Gygax, A.F., Oon, E. and Zhang, H.F. (2008), “Audit quality, auditor compensation and
initial public offering underpricing”, Accounting & Finance, Vol. 48 No. 3, pp. 391-416.
Chemmanur, T.J. (1993), “The pricing of initial public offerings: a dynamic model with information
production”, Journal of Finance, Vol. 48 No. 1, pp. 285-304.
Clarkson, P.M. (1994), “The underpricing of initial public offerings, ex-ante uncertainty, and proxy
selection”, Accounting & Finance, Vol. 34 No. 2, pp. 67-78.
Clarkson, P.M. and Merkley, J. (1994), “Ex-ante uncertainty and the underpricing of initial public
offerings: further Canadian evidence”, Canadian Journal of Administrative Sciences, Vol. 11
No. 1, pp. 54-67.
Datar, S.M., Feltham, G.A. and Hughes, J.S. (1991), “The role of audits and audit quality in valuing new
issues”, Journal of Accounting and Economics, Vol. 14 No. 1, pp. 3-49.
Davino, C., Furno, M. and Vistocco, D. (2013), Quantile Regression: Theory and Applications, 1st ed.,
John Wiley & Sons, Hoboken, NJ.
Dehghani, P. and Sapain, R.Z.Z. (2014), “Sectoral herding behavior in the aftermarket of Malaysian
IPOs”, Venture Capital, Vol. 16 No. 3, pp. 227-246.
Dimovski, W., Philavanh, S. and Brooks, R. (2011), “Underwriter reputation and underpricing: evidence
from the Australian IPO market”, Review of Quantitative Finance and Accounting, Vol. 37 No. 4,
pp. 409-426.
Engelen, P.J. and van Essen, M. (2010), “Underpricing of IPOs: firm-, issue-and country-specific
characteristics”, Journal of Banking & Finance, Vol. 34 No. 8, pp. 1958-1969.
Fan, J.P. and Wong, T.J. (2005), “Do external auditors perform a corporate governance role in
emerging markets? Evidence from East Asia”, Journal of Accounting Research, Vol. 43 No. 1,
pp. 35-72.
Feltham, G.A., Hughes, J.S. and Simunic, D.A. (1991), “Empirical assessment of the impact of auditor
quality on the valuation of new issues”, Journal of Accounting and Economics, Vol. 14 No. 4,
pp. 375-399.
ARA Francis, B.B., Hasan, I. and Zhou, M. (2012), “Strategic conservative earnings management of
26,1 technology firms: Evidence from the IPO market”, Financial Markets, Institutions & Instruments,
Vol. 21 No. 5, pp. 261-293.
Gao, X., Ritter, J.R. and Zhu, Z. (2013), “Where have all the IPOs gone?”, Journal of Financial and
Quantitative Analysis, Vol. 48 No. 6, pp. 1663-1692.
Gasbarro, D., Bundoo, S. and Zumwalt, J.K. (2003), “Underpricing and aftermarket performance of IPO
104 firms in Mauritius”, Journal of Emerging Market Finance, Vol. 2 No. 3, pp. 315-335.
Grinblatt, M. and Hwang, C.Y. (1989), “Signalling and the pricing of new issues”, Journal of Finance,
Vol. 44 No. 2, pp. 393-420.
Gumanti, T.A. and Ariyanto, A. (2005), “Can accounting beta act as a proxy for ex ante uncertainty in
initial public offerings: empirical evidence at the Jakarta Stock Exchange”, SNA, Vol. 8, pp. 11-22.
Habib, M.A. and Ljungqvist, A.P. (1998), “Underpricing and IPO proceeds: a note”, Economics Letters,
Vol. 61 No. 3, pp. 381-383.
Hanley, K.W. and Hoberg, G. (2012), “Litigation risk, strategic disclosure and the underpricing of initial
public offerings”, Journal of Financial Economics, Vol. 103 No. 2, pp. 235-254.
Hao, L. and Naiman, D.Q. (2007), Quantile Regression. Quantitative Applications in the Social Sciences,
1st ed., Sage Publications, London.
Hasnan, S., Abdul Rahman, R. and Mahenthiran, S. (2013), “Management motive, weak governance,
earnings management, and fraudulent financial reporting: Malaysian evidence”, Journal of
International Accounting Research, Vol. 12 No. 1, pp. 1-27.
Hoberg, G. (2007), “The underwriter persistence phenomenon”, Journal of Finance, Vol. 62 No. 3,
pp. 1169-1206.
Hogan, C.E. (1997), “Costs and benefits of audit quality in the IPO market: a self-selection analysis”,
Accounting Review, Vol. 72 No. 1, pp. 67-86.
Hsu, H.C.S. (2013), “Technology timing of IPOs and venture capital incubation”, Journal of Corporate
Finance, Vol. 19, pp. 36-55.
Jenkinson, T. and Ljungqvist, A. (2001), Going Public: The Theory and Evidence on How Companies
Raise Equity Finance, 2nd ed., Oxford University Press, Oxford.
Jones, T.L. and us Swaleheen, M. (2010), “Endogenous examination of underwriter reputation and IPO
returns”, Managerial Finance, Vol. 36 No. 4, pp. 284-293.
Koenker, R. and Basset, G. Jr (1978), “Regression quantiles”, Econometrica: Journal of the Econometric
Society, Vol. 46 No. 1, pp. 33-50.
Koenker, R. and Hallock, K. (2001), “Quantile regression: an introduction”, Journal of Economic
Perspectives, Vol. 15 No. 4, pp. 43-56.
Lee, T.H. and Ali, A.M. (2008), “Audit challenges in Malaysia today”, Accountants Today, Vol. 21
No. 10, pp. 24-26.
Ljungqvist, A. (2007), “IPO underpricing”, in Eckbo, E.B. (Ed.), Handbook of Empirical Corporate
Finance, 2nd ed., Vol. 2, Elsevier, North-Holland, pp. 375-422.
Loughran, T. and Ritter, J.R. (2004), “Why has IPO underpricing changed over time?”, Financial
Management, Vol. 33 No. 3, pp. 5-37.
Loughran, T., Ritter, J.R. and Rydqvist, K. (1994), “Initial public offerings: international insights”,
Pacific-Basin Finance Journal, Vol. 2 No. 2, pp. 165-199.
Loughran, T. and Ritter, J.R. (2002), “Why don’t issuers get upset about leaving money on the table in
IPOs?”, Review of Financial Studies, Vol. 15 No. 2, pp. 413-443.
Lowry, M. and Schwert, G.W. (2004), “Is the IPO pricing process efficient?”, Journal of Financial
Economics, Vol. 71 No. 1, pp. 3-26.
Lowry, M., Michaely, R. and Volkova, E. (2017), “Initial public offering: a synthesis of the literature and
directions for future research”, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_
id=2912354 (accessed 22 September 2017).
Lowry, M., Officer, M.S. and Schwert, G.W. (2010), “The variability of IPO initial returns”, Journal of Explaining
Finance, Vol. 65 No. 2, pp. 425-465. IPO initial
Megginson, W.L. and Weiss, K.A. (1991), “Venture capitalist certification in initial public offerings”, returns in
Journal of Finance, Vol. 46 No. 3, pp. 879-903.
Malaysia
Moshirian, F., Ng, D. and Wu, E. (2010), “Model specification and IPO performance: new insights from
Asia”, Research in International Business and Finance, Vol. 24 No. 1, pp. 62-74.
Muscarella, C.J. and Vetsuypens, M.R. (1989), “A simple test of Baron’s model of IPO underpricing”, 105
Journal of Financial Economics, Vol. 24 No. 1, pp. 125-135.
Nagata, K. (2013), “Does earnings management lead to favorable IPO price formation or further
underpricing? Evidence from Japan”, Journal of Multinational Financial Management, Vol. 23
No. 4, pp. 301-313.
Ong, S.W., Choong Yap, V. and Khong, R.W. (2011), “Corporate failure prediction: a study of public
listed companies in Malaysia”, Managerial Finance, Vol. 37 No. 6, pp. 553-564.
Pu, D. and Wang, S. (2015), “The impact of pricing mechanism reform on underpricing of initial public
offerings in China”, Applied Economics Letters, Vol. 22 No. 14, pp. 1144-1149.
Raji, J.O., Ibrahim, Y. and Ahmad, S.A. (2017), “Stock price index and exchange rate nexus in African
markets”, International Economic Journal, Vol. 31 No. 1, pp. 112-134.
Rashid, R.M., Abdul-Rahim, R. and Yong, O. (2014), “The influence of lock-up provisions on
IPO initial returns: evidence from an emerging market”, Economic Systems, Vol. 38 No. 4,
pp. 487-501.
Ritter, J.R. (1984), “The ‘hot issue’ market of 1980”, Journal of Business, Vol. 57 No. 2, pp. 215-240.
Ritter, J.R. (1991), “The long-run performance of initial public offerings”, Journal of Finance, Vol. 46
No. 1, pp. 3-27.
Ritter, J.R. (2014), “Reenergizing the IPO market”, Journal of Applied Finance, Vol. 24 No. 1,
pp. 37-48.
Ritter, J.R. and Welch, I. (2002), “A review of IPO activity, pricing, and allocations”, Journal of Finance,
Vol. 57 No. 4, pp. 1795-1828.
Rock, K. (1986), “Why new issues are underpriced?”, Journal of Financial Economics, Vol. 15 Nos 1/2,
pp. 187-212.
Roosenboom, P. (2012), “Valuing and pricing IPOs”, Journal of Banking & Finance, Vol. 36 No. 6,
pp. 1653-1664.
Stevens, J.P. (2012), Applied Multivariate Statistics for the Social Sciences, 5th ed., Routledge,
Abingdon-on-Thames.
Titman, S. and Trueman, B. (1986), “Information quality and the valuation of new issues”, Journal of
Accounting and Economics, Vol. 8 No. 2, pp. 159-172.
Welch, I. (1989), “Seasoned offerings, imitation costs, and the underpricing of initial public offerings”,
Journal of Finance, Vol. 44 No. 2, pp. 421-449.
Willenborg, M. (1999), “Empirical analysis of the economic demand for auditing in the initial public
offerings market”, Journal of Accounting Research, Vol. 37 No. 1, pp. 225-238.
Yong, O. (2007), “A review of IPO research in Asia: what’s next?”, Pacific-Basin Finance Journal, Vol. 15
No. 3, pp. 253-275.

Further reading
Albring, S.M., Elder, R.J. and Xu, X. (2016), “Unexpected fees and the prediction of material
weaknesses in internal control over financial reporting”, Journal of Accounting, Auditing &
Finance, pp. 1-21.
Breusch, T.S. and Pagan, A.R. (1979), “A simple test for heteroscedasticity and random coefficient
variation”, Econometrica: Journal of the Econometric Society, Vol. 47 No. 5, pp. 1287-1294.
ARA Hair, J.F., Black, W.C., Babin, B.J. and Anderson, R.E. (2010), Multivariate Data Analysis, 7th ed.,
26,1 Prentice Hall, Upper Saddle River, NJ.
Trauten, A. and Langer, T. (2012), “Information production and bidding in IPOs”, Zeitschrift für
Betriebswirtschaft, Vol. 82 No. 4, pp. 361-388.

About the authors

Bazeet Olayemi Badru obtained his PhD Degree in Financial Analysis and Policy from the Universiti
106 Utara Malaysia (UUM). He obtained his National Diploma in Accountancy, BSc Degree in Finance and
MSc Degree in Finance from the Kwara State Polytechnic Ilorin, the University of Ilorin, Nigeria and
the Universiti Utara Malaysia (UUM), respectively. His research interests include initial public
offerings, corporate governance and market-based research. He has published in Journal of
Multinational Financial Management and International Journal of Management Practice.
Nurwati A. Ahmad-Zaluki is an Associate Professor in Accounting and Finance at the Universiti
Utara Malaysia (UUM). She obtained her PhD Degree in Accounting and Finance from the University
of Stirling, Scotland. She has published in leading accounting and finance journals including the
Journal of Business Finance & Accounting, International Journal of Accounting, Journal of Multinational
Financial Management, Review of Accounting and Finance, International Journal of Managerial Finance
and Asian Review of Accounting. Her articles also appear in professional journals such as Accountants
Today and Banker’s Journal. She won the Emerald Literati Network Outstanding Paper Award 2011
for an article published in Asian Review of Accounting. Nurwati A. Ahmad-Zaluki is the corresponding
author and can be contacted at: nurwati@uum.edu.my

For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: permissions@emeraldinsight.com