Ijmf 01 2018 0025

International Journal of Managerial Finance
Signalling IPO quality through female directors

Bazeet Olayemi Badru, Nurwati A. Ahmad-Zaluki, Wan Nordin Wan-Hussin,
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Bazeet Olayemi Badru, Nurwati A. Ahmad-Zaluki, Wan Nordin Wan-Hussin, (2019) "Signalling IPO
quality through female directors", International Journal of Managerial Finance, https://doi.org/10.1108/
IJMF-01-2018-0025
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Signalling IPO
Signalling IPO quality through quality
female directors
Bazeet Olayemi Badru
School of Economics, Finance and Banking,
Universiti Utara Malaysia, Sintok, Malaysia, and
Nurwati A. Ahmad-Zaluki and Wan Nordin Wan-Hussin Received 19 January 2018
Othman Yeop Abdullah Graduate School of Business Sintok, Revised 18 May 2018
25 December 2018
Universiti Utara Malaysia, Sintok, Malaysia 22 January 2019
Accepted 22 January 2019
Abstract
Purpose – The purpose of this paper is to investigate whether or not the presence of female directors at the
time of an initial public offering (IPO) can be considered as a signal of IPO quality.
Design/methodology/approach – A sample of 220 Malaysian IPOs over the period of 2005–2015 was used.
This study employed the mean regression technique (ordinary least squares and White’s heteroskedasticity-
consistent standard errors) and the median regression technique (quantile regression) to examine the
signalling power of female directors on the board at the time of an IPO.
Findings – The results show that the presence and proportion of female directors at the time of the IPO have
negative effects on IPO initial returns (IR). The negative effects occur at both the conditional mean and the
dispersion of IPO IR. These results are robust to endogeneity bias.
Practical implications – The findings of this study suggest that female directors on the board at the time
of an IPO can be considered as a desirable signal of IPO quality. As a result, IPO issuers can consider
signalling the quality of their IPOs by having female directors on their boards. Likewise, market participants
can use female directors as an instrument to value an IPO.
Originality/value – Studies on the impact of female directors on the board have largely been centred on
established companies. Thus, this study contributes to the literature by examining the signalling role of
women at the time of an IPO, which is considered as a significant milestone in the lifecycle of a company.
Keywords Malaysia, Female directors, Quantile regression, IPO initial returns, Signalling quality
Paper type Research paper
1. Introduction
Initial public offering (IPO) is the most significant event in the lifecycle of a company, and
the most common mechanism for raising non-interest bearing capital in the capital market.
Capital raised through an IPO in most cases is used for pursuing growth opportunities,
among others (see Badru et al., 2016, 2019; Kim and Weisbach, 2008). However, one of the
greatest puzzles created by this event is the huge initial returns (IR) that occur on the first
trading day, popularly referred to as IPO underpricing[1]. IPO underpricing is a challenge to
market efficiency and it appears to be pervasive across financial markets (Banerjee et al.,
2011), including in Asia (Yong, 2007; Moshirian et al., 2010), the consequence of which
reduces the capital expected by the company through the IPO process to facilitate various
operational activities (Lin and Chuang, 2011). IPO underpricing is also considered as a direct
wealth transfer from founders and pre-IPO shareholders to new investors (Filatotchev and
Bishop, 2002). Therefore, the prominent effect of IPO underpricing on the amount of capital
raised and owners’ wealth creates a central challenge for IPO issuers on how best to
diminish IPO underpricing.
The signalling theory suggests that signals, which are attributes or actions, can provide
information about unobservable characteristics of the issuers, thereby reducing IPO
underpricing (Connelly et al., 2011; Leland and Pyle, 1977). As investors rely on signals from
IPO issuers to make investment decisions at the time of IPO, academic literature has International Journal of Managerial
Finance
suggested that corporate governance mechanisms can play a signalling role to build © Emerald Publishing Limited
1743-9132
legitimacy required in the face of liability of market newness (Sanders and Boivie, 2004; DOI 10.1108/IJMF-01-2018-0025
IJMF Certo, 2003). Most especially, the inclusion of female directors can theoretically signal that a
company has a high level of corporate governance and an appropriate board structure at the
time of IPO (Bilimoria, 2000; Burke, 2003). This is because female directors provide
several benefits, such as competitive advantage, team diversity in terms of cognitive
diversity in decision making and other strategy areas (McGuinness, 2018). Female
directors are considered better monitors and mentors, and instrumental to positive changes,
such as innovation (Adams and Ferreira, 2009). Extant literature also believes that female
directors bring resources and value to the company, and enhance the capabilities of
companies to be more profitable (Badru et al., 2017; Hillman et al., 2007; Quintana-Garcia and
Benavides-Velasco, 2016; Reutzel and Belsito, 2015).
Despite the potential benefits of female directors, only a few studies, such as Handa and
Singh (2015) and Kaur and Singh (2015), examined the influence of female directors on the
board at the time of IPO on IPO IR in the Indian IPO market. However, both studies have
found no significant influence of female directors. A similar study by Reutzel and Belsito
(2015) examined the same issue and finds a positive association between female directors
and IPO IR in the US IPO market. A glimpse at these findings suggests that the impact of
female directors at the time of IPO remains equivocal. Therefore, the current study presents
a fresh look at the impact of female directors on IPO IR in the Malaysian IPO market, with
the presumption that it can serve as an important signal of IPO quality and investors would
have favourable perception of the companies, thereby reducing IPO IR.
The Malaysian IPO market is an interesting environment to investigate this in
accordance with the following motivations. The first motivation is that investors in the
Malaysian IPO market experience severe information asymmetry in terms of valuation
uncertainty (Abdul Rahim et al., 2012). Moreover, when information asymmetry is high,
investors rely on signals. Thus, the present study suggests one of such signals can be the
presence of women on the boards at the time of IPO. When a company decides to raise
capital through an IPO, the pre-IPO owners must select and appoint the board of directors.
An ideal board should theoretically include female directors in order to attract investors to
subscribe to the company’s shares or for potential investors not to price-protect themselves
by looking for higher IR on the first day of trading (Burke, 2003). In fact, prior empirical
studies have documented that the level of IPO IR in the Malaysian IPO market is higher as
compared to other developed Asian and Western IPO markets (Loughran et al., 1994;
Moshirian et al., 2010).
The second motivation is that regulatory agencies and investor groups across the globe are
continuously desiring greater female representation on corporate boards to the extent that it is
now a policy for several countries (McGuinness, 2018; Vittorio, 2017). In particular, Malaysia
has set year 2020 as the year all public listed companies (PLCs) must have at least 30 per cent of
women on their boards. Although the female labour force participation rate has increased from
46 per cent in 2009 to 54.3 per cent in 2016, 17 of the top 100 PLCs have no women on their
boards (see The Former Prime Minister’s keynote address at the 13th edition of the annual
Invest Malaysia, Kuala Lumpur; co-organized by Bursa Malaysia and CIMB Investment
Bank, 2017). However, recent findings by the McKinsey Global Institute suggest that in the
East and Southeast Asia, gender diversity can increase gross domestic product (GDP) by
8 per cent, contributing US$0.9 trillion to the global GDP (Woetzel et al., 2016). Therefore, it
would be of interest if the presence of female directors can serve as a signalling mechanism.
This would encourage companies to have more women on the corporate board and companies
that do not have female directors to be motivated to appoint women to their corporate board.
The third motivation is that the Malaysian capital market is home to the largest number
of listed companies in the Association of Southeast Asian Nations and it has continued to
attract the interest of domestic and foreign investors. As such, the continued participation of
investors in the capital market is paramount.
The fourth motivation is to answer Yong’s (2007) call for studies on IPOs to examine the Signalling IPO
influence of corporate governance mechanisms on IPO IR in the Asian capital market. quality
Despite Yong’s (2007) call, none of the prior literature (Badru et al., 2018; Darmadi and
Gunawan, 2013; Lin and Chuang, 2011; Yatim, 2011) has considered the influence of female
directors on IPO IR. Hence, this study fills the gap in the IPO literature. In line with the
purpose of the study, the present study finds a significantly negative association between
female directors and IPO IR, which implies that female directors influence IPO IR in the
Malaysian IPO market. Based on the results unveiled, which are also robust to endogeneity
analysis and interaction effects, this study concludes that gender composition of boards at
the time of IPO could play a signalling role.
The rest of the paper is structured as follows. The next section captures the literature
review and hypothesis development. Section 3 discusses the research method. Section 4
presents the results, and Section 5 provides the discussion and conclusion of the study.
2. Literature review and hypothesis development

A typical company making an IPO suffers from what is referred to as “liability of market
newness” because of limited operating track records available to potential investors to judge
the intrinsic quality of the company and its potential for growth (Certo, 2003). Since, issuers
have limited amount of information at the time of IPO, potential investors face difficulty in
evaluating the intrinsic value of IPO companies. As such, potential investors may discount
the amount they are willing to pay for an IPO. Such discount is often manifested in the form
of IPO underpricing (Certo, 2003). To overcome the problem of information asymmetry/
uncertainties surrounding company value, one way to reduce the level of IPO underpricing
is to use signals (Connelly et al., 2011; Leland and Pyle, 1977). These signals provide
information on the unobservable characteristics of the issuers. Most especially, when
information asymmetry is high, market participants rely on signals to consummate
economic exchanges. Such signals reduce information asymmetry surrounding the viability
of IPO companies that potential investors seek to invest in, thereby increasing the return on
their investments (Reutzel and Belsito, 2015).
A growing body of research suggests that investors can draw insights from the signals
of corporate governance mechanisms put in place by the company at the time of IPO (Certo,
2003; Certo et al., 2001). Notably, the board of directors stands as the main manifestation of a
company’s corporate governance quality. The boards of directors are critical to strategic
and financial decision making in companies (Fama and Jensen, 1983). The boards of
directors perform multiple functions, which include monitoring and control, as professed by
the agency theory (Adams and Ferreira, 2009; Fama and Jensen, 1983); and advising on
strategies, counselling and providing external resources in terms of contracts and industry
networks to bring resources to the company, as suggested by the resource dependence
theory (Hillman et al., 2007; Pfeffer, 1972, 1973). Based on these multiple functions of the
board, Sanders and Boivie (2004) argue that board structure can serve as a useful screening
and sorting criterion that can influence investors’ valuations of an IPO company and serve
as a signal of IPO quality. Thus, IPO issuers can consider board structure as an important
signalling mechanism.
Moreover, studies have demonstrated that gender diversity is an aspect of board
structure that represents a salient characteristic of a company to investors (Burke, 2003;
Mohan and Chen, 2004). Since IPO issuers are more informed about their future growth and
profitability than other market participants (Certo, 2003), gender mix can serve as an
important instrument that issuers can use to convey their potential (Handa and Singh, 2015).
Several studies (Burke, 1997; Leslie et al., 2017) have contended that companies are likely to
benefit from employing female directors. Such benefits include competitive advantage
because women can exert a positive effect on performance through resources, like creativity
IJMF and innovation (McMahan et al., 1998). Female directors also have a better understanding of
the market. For instance, Burke (1997, 2003) and Bilimoria (2000) are of the view that women
have intimate knowledge of customer markets and are socially responsible. This increases a
company’s chances to penetrate markets to gain legitimacy (Campbell and Minguez-Vera,
2008). In accordance with this view, Badru et al. (2017) and Dimovski and Brooks (2006)
argue that IPO issuers employ female directors at the time of IPO to increase their
company’s chance of raising capital and to maximise company value.
Additionally, when it comes to strategic planning, women are slightly better than men
because they evaluate several strategic alternatives thoroughly and are willing to work hard
on tasks assigned to them (Huse and Solberg, 2006; Nielsen and Huse, 2010)[2]. In fact, they
assist the boards to execute their strategic functions more effectively because they possess
broader skills and knowledge, which, at any given time, are often closely aligned to the
company’s needs (Ku Ismail and Abdul Manaf, 2016).
Furthermore, in terms of monitoring function, female directors are better monitors and
less tolerant of opportunistic behaviours (Adams and Ferreira, 2009; Chen, Eshleman and
Soileau, 2016). Specifically, Adams and Ferreira (2009) document that female board directors
have better attendance records than male directors and female directors are more likely to
join monitoring committees, such as the audit committee or the compensation committee. In
fact, boards with a higher number of female directors demand for higher audit quality
(Lai et al., 2017). In a similar vein, Chen, Eshleman and Soileau (2016) indicate that female
board members reduce internal control weaknesses in a company, regardless of whether or
not they sit on the audit committee. In another related study, Wahid (2018) reports that
companies with more female directors commit fewer financial reporting mistakes and
engage in less fraudulent activities. All these suggest that female directors enhance board
effectiveness. Therefore, it is expected that investors would perceive the presence of female
directors at the time of IPO as a signal of IPO quality, thereby mitigating the uncertainties
surrounding the future prospects of the company and resulting in lower IPO IR.
Although a few academic papers have examined the nexus between female directors and
IPO IR, there is still no convincing evidence that female directors reduce IPO IR. For
example, Reutzel and Belsito (2015) examine how IPO investors view female presence on the
board of IPO companies in the US. The results show that IPO investors react negatively to
female board members, resulting in a positive influence on IPO IR. On the contrary, Mohan
and Chen (2004) find no significant difference between male- and female-led IPOs in terms of
IPO IR, which indicates that investors perceive male-led and female-led IPOs with the same
uncertainties. Corroborating Mohan and Chen’s (2004) findings, Dimovski and Brooks (2006)
document that investors do not attach relevance to the presence of female directors on the
board of IPO companies when their investment decision is focussed on property trust and
technology IPOs in Australia. Similarly, for a sample IPOs in the Hong Kong IPO market,
McGuinness (2018) shows that the proportion of female directors has an insignificant and
negative influence on IPO IR. In a similar vein, Handa and Singh (2015) report a
non-significant and negative association between the proportion of female directors and IPO
IR in the Indian IPO market. Kaur and Singh (2015) also find similar evidence when both
proportion and presence of female directors are used. Both authors argue that the negative
sign reflects a company’s commitment to effective governance. Additionally, they claim that
the presence of female directors on the board is perceived by investors as the ability of the
company to deal with the complex environment, like IPO, thereby reducing uncertainties
about the company’s value. In line with these two studies (Handa and Singh, 2015; Kaur and
Singh, 2015), Welbourne (1999) argues that the inclusion of women as board members at the
time of IPO can serve as a signal of IPO quality. This lowers uncertainty in the minds of
investors, leading to reduction in information asymmetry that potential investors possibly
face when subscribing to a company’s shares, and hence ultimately diminishing IPO IR.
Moreover, several studies have claimed that companies would benefit from engaging Signalling IPO
women on the board at the time of IPO. For example, McGuinness (2018) mentions that it is a quality
signal of managerial competency and enhances company value.
In fact, scholars who have conducted event studies have unanimously agreed that
following the announcement of the appointment of a woman to the board of directors of
PLCs, a positive abnormal returns exists, which is an indication that investors positively
react to such announcement (Campbell and Minguez-Vera, 2010; Ku Ismail and Abdul
Manaf, 2016). This evidence also clearly indicates that investors understand the potential of
female directors towards improving company performance. If investors could react
positively to the announcement of female directors on the boards of established companies,
then, in a complex environment like the IPO market where information asymmetry between
IPO issuers and potential investors is a common occurrence, female directors can be used as
a signal to mitigate information asymmetry. For instance, Chen, Ni and Tong (2016) report
that female directors enhance board effectiveness in risk management with respect to R&D
investments by lowering R&D risk. Academic studies have also documented the positive
impact of female directors on earnings quality (Gul et al., 2011; Srinidhi et al., 2011; Wahid,
2018) and company performance (Conyon and He, 2017). Therefore, considering the claims
on the potential impact of female directors, which includes enhancing the reputation of the
company, improvement in board decision-making quality, effective board strategic direction
and control, effective monitoring and better performance, this study posits that female
directors can serve as a signal of IPO quality and negatively affect IPO IR. Hence, this study
hypothesises that:
H1. The presence of female directors on the board is negatively associated with IPO IR.
3. Research methods
3.1 Sample and data collection
The hypothesis developed was tested on a sample of 220 IPOs over the period of 2005–2015.
Although the total population of IPOs over this period is 301, the exclusion of finance (10),
real estate investment trusts (28), close-ended funds (1), special purpose acquisition
companies (5) and other IPOs with incomplete financial information to measure the Z-Score,
gives a final sample of 220. The exclusion of these IPOs is consistent with prior IPO studies,
such as Badru and Ahmad-Zaluki (2018), Reutzel and Belsito (2015) and Ahmad-Zaluki
(2012), because these IPOs are non-operating companies and have different regulatory
requirements. All the data related to gender composition and other board-specific corporate
governance variables (e.g. board size, proportion of non-executive directors on the board,
CEO duality) are extracted from the prospectuses issued by companies at the time of IPO.
This study focusses on the board of directors because they are solely responsible for
decision making and have the collective responsibility for the success of the company.
Information related to the board of directors is identified from the corporate directory
section in the prospectus and cross-checked with the section dedicated to information on
board of directors’ profile under the information on promoters, substantial shareholders,
directors and key management. The offer price, underwriter’s and auditor’s name, financial
data for computation of Altman Z-Score and pre-IPO total assets are taken from the
prospectuses, while the first-day closing market prices are downloaded from the Datastream
of Universiti Utara Malaysia.
3.2 Variables of the study

3.2.1 Dependent variable. The dependent variable is IPO IR. This is calculated as the
difference between the first day closing price and the offer price divided by the offer price
(Certo et al., 2001; Reutzel and Belsito, 2015).
IJMF 3.2.2 Independent variable. To examine the impact of female directors on IPO IR, two
measurements of female representation on the board at the time of IPO are considered. The
first measurement is a dummy value of 1 for any IPO company that has at least one female
director on the board, and otherwise, 0. This measurement is consistent with prior IPO
studies on gender diversity (e.g. Kaur and Singh, 2015). The second measurement is the
proportion of female directors on the board to total number of directors on the board at the
time of IPO (Handa and Singh, 2015; Reutzel and Belsito, 2015). The gender identity of
directors is determined by the names of each director and other gender specific words, such
as he/she and Binti/Bin[3].
3.2.3 Control variables. Prior studies have identified some variables that tend to have
significant impact on IPO IR. These include company size, company age, listing delay, IPO
risk, pre-IPO financial condition, underwriter reputation, auditor’s quality, technology IPO,
allocation of IPO proceeds for R&D and participation of institutional investors and
board-specific variables, such as board size, proportion of non-executive directors and CEO
duality. Larger IPOs and IPOs with long operating history are considered less risky and
better established than smaller IPOs because such IPOs are more likely to have more
information available to the public, thus reducing the information asymmetry and
uncertainties surrounding IPO valuation. Therefore, there may be lesser requests from
investors for compensation in terms of underpricing for investing in such IPO shares
(Agathee et al., 2012; McGuinness, 2018; Reutzel and Belsito, 2015). Hence, a negative
relationship exists between company size, company age and IPO IR. Similarly, IPOs with
strong pre-IPO financial condition, i.e. IPOs with high Z-Score, may be viewed by the market
as a proxy surrounding the uncertainty of the issue or a proxy for signalling the quality of
the issue (Agathee et al., 2012). Therefore, IPOs with a strong financial condition are likely to
be associated with lower or higher IR.
Accordingly, the listing delay, which is the number of days from the date of the
prospectus registration to the listing date, is a proxy for investors’ demand regarding the
issue. The shorter or longer the listing delay, the higher or lower the demand from investors
and the higher the level of underpricing needed to overcome the information disadvantage
of uninformed investors (Handa and Singh, 2015; Wyatt, 2014). Hence, a negative
relationship exists between listing delay and IPO IR. Moving on to IPO risk, which is a
measure of risk associated with return on investment, the level of risk associated with a
company reflects the returns attributable to its investors (Abdul Rahim and Yong, 2010;
Bradley and Jordan, 2002). As such, IPO risk is positively associated with IPO IR. The
reputation of financial intermediaries, such as underwriter and auditor, who have privileged
access to pre-IPO information before the issuance of the prospectus, captures the due
diligence and high-quality certification of the financial intermediaries. These two financial
intermediaries play a significant role in signalling the quality of the IPO, thereby reducing
the uncertainty of IPO, thus resulting in lower IPO IR (Beatty, 1989; Carter et al., 1998;
McGuinness, 2018; Reutzel and Belsito, 2015).
Prior studies have also suggested that the business activities of the company may
influence investors’ demand for the company’s shares and subsequently cause an increase
in the closing price on first trading day, thus leading to higher IR (Che-Yahya et al., 2017).
For instance, technology IPOs are regarded as IPOs with potential future growth that can
motivate prospective investors to subscribe to the company’s shares. However, the existence
of growth opportunities is associated with uncertain future cash flows that induce
information asymmetry surrounding the IPO value. Thus, such IPOs may be considered
riskier because of the uncertain future cash flow streams. For this reason, investors must be
compensated for the inherent risks associated with technology IPOs. Therefore, this study
posits that technology IPOs are positively associated with IPO IR.
In most instances, an IPO is often considered as an avenue for a company to pursue Signalling IPO
growth opportunities for the company (Quintana-Garcia and Benavides-Velasco, 2016). quality
Thus, issuers of IPOs can use investment in growth opportunities to send signals about the
company’s prospects to potential investors as this can reveal that the company is of good
quality. By doing so, issuers are expected to allocate a larger amount of capital raised to
growth investment, which can drive the company’s growth, and eventually result in
increased company value. One major investment associated with growth opportunities is
investment in research and development (R&D) activities (Chahine et al., 2007; Leone et al.
2007). Although investment in R&D is a key driver of long-term economic growth of the
company, R&D investment is associated with risk, making it difficult for potential investors
to evaluate the company properly. The risk associated with R&D activities comes from the
uncertainty surrounding the future operating cash flows of R&D investments, thus
impacting IPO IR (Cho and Lee, 2013; Guo et al., 2006; Wyatt, 2014). This suggests that the
information asymmetry that gives rise to IPO IR can be found through investment in R&D.
Hence, this study proposes that larger allocation of capital raised to R&D investment is
positively associated with IPO IR.
Furthermore, the participation of institutional investors in the IPO market cannot be
simply ignored in the IPO process. These institutional investors are long-term investors that
mostly invest in companies with favourable future prospects (Che-Yahya et al., 2017). With
their participation, it sends signals to potential investors that the IPO is of high quality and
potentially viable. This would motivate potential investors to subscribe to the company’s
shares, thereby causing pressure on the demand for company shares and consequently
causing an increase in the shares’ closing price on the first trading day. The increase in the
share closing price impacts IPO IR. Therefore, IPO issuers that allow greater participation of
institutional investors in shares issued may be associated with higher IPO IR because
potential investors may consider institutional investors’ participation as an indication that
the IPO is of good quality (Aggarwal and Dahiya, 2000; Stoughton and Zechner, 1998).
Empirical studies in this regard have found that institutional investors’ participation in an
IPO is positively associated with IPO IR, which concurs with the signalling role of
institutional investors (Che-Yahya et al., 2017; Sapian et al., 2013). On this note, this study
suggests that greater participation of institutional investors in an IPO is positively
associated with IPO IR.
Other board-specific corporate governance variables found to have influence on IPO IR
are board size, proportion of non-executive directors and CEO duality. Board size is one of
the corporate governance variables that have a significant influence on board decisions.
A large board size is argued to have a greater pool of knowledge and expertise that is
beneficial to the company. Larger boards also lead to greater information sharing among a
larger number of decision makers, which enables the board to take quality decisions and
have more effective monitoring of the management (Certo et al., 2001; Coles et al., 2008;
Darmadi and Gunawan, 2013). Thus, board size is negatively related to IPO IR.
Scholars have also demonstrated that higher proportion of non-executive directors on the
board enhances board monitoring, which, in turn, mitigates information asymmetry and
reduces IPO IR (Chiraz and Jarboui, 2016; Darmadi and Gunawan, 2013; Filatotchev and
Bishop, 2002; Lin and Chuang, 2011). Recent research has suggested that investors may
view the separation of the roles of CEO and board chair as a negative signal of IPO value,
because it is assumed that IPO companies are growth-oriented and generally more risky.
Therefore, IPO companies should be better led by someone who is familiar with the
company’s growth opportunities via a more independent board structure (Yatim, 2011).
Hence, CEO duality may reduce uncertainty surrounding the IPO due to assumption that
the company is being managed by a person familiar with the future prospects of the
IJMF company at the time of IPO. In this vein, a negative relationship exists between CEO
duality and IPO IR.
Model specification is as follows:
To test the hypothesis, OLS and quantile regressions (QR) are used, as specified in Model
1 and Model 2, respectively:
Model 1:
IRi ¼ b0 þb1 LNCAi þb2 LNLDi þb3 IPORISKi þb4 URi þb5 AQi þb6 LNTAi
þ b7 Z_Scorei þb8 TIPOi þb9 R&Di þb10 INSi þb11 LNBSi þb12 PNDi
þb13 CEODUAi þb14 FDMi þei :
Model 2:
IRq ¼ b0q þb1q LNCAi þb2q LNLDi þb3q IPORISKi þb4q URi þb5q AQi þb6q LNTAi
þb7q Z_Scorei þb8q TIPOi þb9q R&Di þb10q INSi þb11q LNBSi þb12q PNDi
þb13q CEODUAi þb14q FDMi þei ;
where q indicates a quantile in the conditional distribution of the amount of capital raised.
The q(s) values are 0.25, 0.50 and 0.75.
In Models 1 and 2, IR represents IPO IR. LNCA is the company age at the time of IPO,
measured as a logarithm transformation (1 plus year of incorporation to the IPO year).
LNLD is the listing delay, measured as a natural logarithm of number of days from the
date of the prospectus registration to listing date. IPORISK is the reciprocal of IPO offer
price. UR represents underwriter reputation, measured as a value of 1 for IPOs
underwritten by top 5 underwriters and 0, if otherwise. The top 5 underwriters are Affin
Hwang Investment Berhad, CIMB Investment Bank Berhad, RHB, MayBank and Kenanga
Investment Berhad. Similarly, AQ is auditor’s quality, which is measured as a value equal
to 1 if the financial information in the prospectus is audited by audit firms affiliated with
the Big 4 (Ernst and Young, PricewaterhouseCoopers, KPMG and Deloitte) and 0, if
otherwise. LNTA is a proxy for company size, measured as a natural logarithm of pre-IPO
total assets. Z-Score is a proxy for pre-IPO financial condition calculated based on model 3.
TIPO is a dummy variable of 1 for IPOs listed in the technology industry and 0 for
non-technology IPOs. R&D is the percentage of IPO proceeds allocated to R&D activities.
INS is the proportion of shares issued under private placement to total number of shares
issued. LNBS represents board size, measured as the natural logarithm of total number of
directors on the board at the time of IPO. PND is the proportion of non-executive directors
to total number of directors at the time of IPO. CEODUA denotes CEO duality, measured
as a binary number of 1 if the CEO and board chair positions are combined, and, if
separated, 0. FDM takes the value of 1 for an IPO company has a female director on the
board, otherwise 0 and ε is the error term.
Model 3 is used to measure the pre-IPO financial condition of the company as follows:
Z i ¼ 0:717X 1i þ 0:847X 2i þ3:107X 3i þ0:420X 4i þ0:998X 5i ;
where Z is the measure of overall financial health of the company, X1 represents the net
assets of the company’s liquidity relative to current assets minus current liabilities divided
by total assets, X2 represents the total amount of reinvested earnings calculated as retained
earnings divided 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 divided by book value of Signalling IPO
liabilities, and X5 represents income generating ability and management capacity in dealing quality
with competitive conditions. This is calculated as sales divided by total assets.
4. Analysis of results
4.1 Descriptive analysis
Table I presents the descriptive statistics for all the variables incorporated in the analysis.
The IR of IPO companies in the sample period ranges from −78.44 to 404.17 per cent, with a
mean value of 14.42 per cent. The mean value suggests that on average, IPO companies
experience IR of 14.42 per cent. Although the average IR found in this study is
comparatively lower than the 21.22 per cent reported by Ammer and Ahmad-Zaluki (2016)
and 30.21 per cent documented by Abdul-Rahim and Che-Embi (2013), IPO IR remains a
persistent phenomenon in the Malaysian IPO market like other IPO markets all over the
world. In addition, the maximum amount of IPO IR indicates that an IPO issuer lost almost
404.17 per cent in terms of lesser amount of capital received due to incorrect pricing of the
Variables Mean Med Max Min SD Skewness Kurtosis
Initial Returns (IR) 14.42 5.07 404.17 −78.44 49.82 3.45 23.04
Company Age 5.83 3.00 38.00 1.30 6.69 2.61 10.07
Ln Company Age (LNCA) 1.39 1.10 3.64 0.26 1.02 1.10 3.21
Listing Delay 23.87 22.50 53.00 13.00 6.20 1.42 6.25
Ln Listing Delay (LNLD) 3.14 3.11 3.97 2.56 0.24 0.52 3.46
Offer Price (RM) 0.84 0.68 4.55 0.12 0.65 2.29 9.81
IPORISK 1.86 1.47 8.33 0.22 1.27 1.67 6.82
Z-Score 1.99 1.81 6.71 −3.11 1.04 0.42 6.95
Total Assets (RM million) 408.83 66.03 29,336.07 1.74 2,120.56 11.90 159.56
Ln Total Assets (LNTA) 18.12 18.01 24.10 14.37 1.50 0.81 4.23
Underwriter’s Reputation (UR) 0.43 0.00 1.00 0.00 0.50 0.27 1.08
Auditor’s Quality (AQ) 0.41 0.00 1.00 0.00 0.49 0.35 1.12
Technology IPO (TIPO) 0.25 0.00 1.00 0.00 0.44 1.13 2.27
Research and Development (R&D) 0.09 0.00 0.88 0.00 0.14 1.79 7.26
Institutional Shareholdings (INS) 0.48 0.50 0.95 0.00 0.30 −0.18 1.67
Board Size 6.84 7.00 13.00 4.00 1.52 0.88 4.28
Ln Board Size (LNBS) 1.90 1.95 2.56 1.39 0.22 0.20 3.07
Non-executive Directors (%) (PND) 0.60 0.57 1.00 0.25 0.20 0.60 2.43
Female Directors (%) (PFD) 0.09 0.00 0.50 0.00 0.12 1.47 4.86
Female Dummy (FDM) 0.43 0.00 1.00 0.00 0.50 0.28 1.08
CEO Duality (CEODUA) 0.26 0.00 1.00 0.00 0.44 1.10 2.21
Notes: IR represents IPO initial return; LNCA is the natural logarithm of year of incorporation to the listing
year; LNLD is the natural logarithm of the difference in days between the listing date and the close of issue
date; IPORISK is the reciprocal of IPO offer price as disclosed in the prospectus; Z-Score is the continuous
value derived from the Altman Z-Score model; LNTA is the natural logarithm of pre-IPO total assets; UR is a
dummy variable of 1 for reputable underwriter, otherwise 0; AQ is a dummy variable of 1 for high quality
auditor, otherwise 0; TIPO is a dummy variable of 1 for IPO listed in the technology industry and 0 if
otherwise; R&D is the amount of capital raised allocated to research and development; INS is the percentage
of shares issued allocated to institutional investors; LNBS is the natural logarithm of the total number of
directors on each company’s board at the time of IPO; PND is the percentage of non-executive directors to
total number of directors; PFD is the proportion of female directors to total number of directors to total board
size at the time of IPO; FDM represents the presence of female directors on the board, which takes a binary Table I.
number of 1 if an IPO company has a female director on the board, otherwise 0; CEODUA represents a Descriptive Statistics
dummy variable of 1 when the roles of CEO and board Chairperson are held by a single individual, and 0, of all variables
when separated for 220 IPOs
IJMF IPO, while the minimum amount of IPO IR reveals that an IPO issuer benefited from raising
more capital from investors as the IPO was overpriced by 78.44 per cent.
Noticeably, the board of directors of the IPO company with the maximum amount of IPO
IR has no presence of female board members, which indicates that all the board members
are men. Based on the average age, Malaysian IPO companies signify interest in going
public after six years of being incorporated, while it takes some companies as long as 38
years before going public. The average length of time between IPO offer date and listing
date is approximately 24 days, while the overall range is between 13 and 53 days. Similarly,
the offer price ranges from RM0.12 to RM4.55. The IPORISK, measured as reciprocal of offer
price, ranges from 0.22 to 8.33. The pre-IPO financial condition, measured as Altman Z-Score
shows a mean value of 1.99. This reveals that an average Malaysian IPO has strong
financial status. Company size, measured as pre-IPO total assets, ranges from RM1.74
million to RM29,336.07m. In addition, 43 and 41 per cent of the sampled IPOs employ the
services of reputable underwriter and high quality auditor, respectively. Similarly,
25 per cent of the sampled IPOs are listed in the technology industries. On average,
9.36 per cent of the IPO proceeds is allocated to R&D. Notably, the dominance of
institutional investors’ participation in the IPO process is significant as almost 48 per cent
of shares issued are, on average, allocated to institutional investors.
The average board size of IPO companies is seven, while the maximum number of board
members is 13. In addition, more than 60 per cent of the board members are non-executive
directors. On average, almost 9 per cent of directors on the board are female directors (PFD),
while 43 per cent of IPO companies have the presence of female directors (FDM) on their
boards at the time of IPO. Approximately 26 per cent of IPO companies under study have a
single person sitting in the capacity of CEO and board chair of the company at the time of
IPO (CEODUA), which implies that most Malaysian companies separate the role of CEO
from board chair. However, this is considerably high as compared to 7.1 per cent found by
McGuinness (2018) in the case of 269 Hong Kong IPOs. Further analysis on gender
classification of board of IPO companies under study is presented in Table II.
Table II provides a detailed description of gender distribution on the boards of IPO
companies between 2005 and 2015. Generally, female directors are underrepresented on
the board of directors of the 220 IPOs. It is found that women constitute only 8.77 per cent
of directors on board, which is similar to 8.23 per cent reported by Ahmad-Zaluki (2012)
for a sample of 228 IPOs over the period of 1999 to 2006 and slightly lower than
9.97 per cent reported by McGuinness (2018) for a sample of 269 Hong Kong IPOs. In
addition, only 43.18 per cent of IPO companies have female directors on their boards. This
evidence suggests that more than half of the IPO companies do not appoint female
directors to their board. Further statistics show that the maximum number of female
directors on the board is four, compared to a maximum of 12 male directors. The three
companies with the maximum number of female directors were listed in 2006, 2013 and
2015; two belong to consumer products and one belongs to the trading and services
industry. This indicates that these three companies do not only support female
Gender No. of director positions No. of companies Mean Min Max

Male 1,367 125 6.21 3.00 12.00
Female 132 95 0.60 0.00 4.00
Total 1,505 220 6.84 4.00 13.00
Table II. Distribution of female directors on the board

Gender distribution Categories of female directors One Two Three Four
of directors on the Number of companies 67 20 5 3
board of 220 IPOs Percentage to total no. of companies 30.45 9.09 2.27 1.36
representation on the board, but also have a critical mass of female representation on their Signalling IPO
boards. In general, only 12.73 per cent of IPO companies under study have more than one quality
female board member, which is comparatively higher than 6 per cent reported by Handa
and Singh (2015) for a sample of 404 IPOs. The period this occurred was after the gender
composition policy for the public sector in 2004 was enforced. Having identified gender
composition of the board of directors based on the sampled IPOs, the present study
examines the characteristics of IPO companies according to gender on the board. Table III
presents this issue and company characteristics of IPOs based on gender.
As shown in Table III, both the average and maximum IR of female-led IPOs is lower than
male-led IPOs. For example, the average IR of female-led IPOs are 6.6 per cent, while male-led
IPOs are 20.36 per cent. Similarly, the maximum IR of female-led IPOs is 127.27 per cent,
whereas male-led IPOs have more than triple of first IR of female-led IPOs (404.17 per cent).
These figures clearly suggest that female directors on the boards of companies at the time of
IPO are likely to have an effect on the amount at which an IPO can be underpriced. As such,
female directors can serve as a signal of IPO quality. However, the test for the difference
between the two gender groups is non-significant. Another noticeable characteristic of
female-led IPOs is that such IPOs take a longer period to go public after the date of
incorporation as compared to their male-led counterparts. On average, it takes a female-led
IPO as long as 38 years before aiming to raise capital through IPO, whereas male-led IPOs
only take as long as 35 years. Moreover, it is interesting that a significant difference at the
1 per cent level (z-value 2.65, p-value 0.00) is found between the number of days it takes a
female-led IPO and a male-led IPO to commence trading on the stock exchange. Female-led
IPOs are found to commence trading of their shares earlier than the male-led IPOs. This
suggests that having female directors on the board provides some benefits to IPO issuers.
Interestingly, IPO companies with female directors as board members employ the service of
reputable underwriter and high quality auditor than all male boards of IPO companies. In fact,
such companies are larger than male-led IPOs. This evidence is similar to Dimovski and
Mean Median Max

Variables Male Female Male Female Male Female Wilcoxon z-value ( p-values)
IR 20.36 6.60 7.89 4.55 404.17 127.27 1.18 (0.24)

CA 5.56 6.20 3.00 3.00 35.00 38.00 −1.12 (0.26)
LD 24.46 23.09 24.00 21.00 46.00 53.00 2.65 (0.00)
OP 0.79 0.91 0.60 0.75 4.55 3.61 −1.61 (0.11)
UR 39.20 48.42 0.00 0.00 1.00 1.00 −1.37 (0.17)
AQ 41.00 42.11 0.00 0.00 1.00 1.00 −0.19 (0.84)
TA 255.84 610.13 60.53 82.84 7,138.67 29,336.07 −1.31 (0.19)
Z-Score 1.97 1.89 1.81 1.77 6.71 5.10 −0.11 (0.91)
TIPO 26.40 24.21 0.00 0.00 1.00 1.00 0.37 (0.71)
R&D 10.97 7.25 0.00 0.00 87.69 42.41 2.04 (0.04)
INS 45.37 50.96 45.50 56.68 94.63 93.33 −1.37 (0.17)
PND 59.72 61.54 57.14 57.14 100.00 100.00 −0.38 (0.69)
CEODUA 31.20 18.94 0.00 0.00 100.00 100.00 2.05 (0.04)
Notes: IR represents IPO initial returns; CA is the company age measured as year of incorporation to the
listing year; LD is listing delay, which is difference in days between the listing date and the close of issue date;
OP is the offer price; UR is a dummy variable of 1 for reputable underwriter, otherwise 0; AQ is a dummy
variable of 1 for high quality auditor, otherwise 0; TA is the pre-IPO total assets; Z-Score is the continuous
value derived from the Altman Z-Score model; TIPO is a dummy variable of 1 for IPOs listed in the technology
industry and 0 if otherwise; R&D is the amount of capital raised allocated to research and development; INS is
the percentage of shares issued allocated to institutional investors; PND is the percentage of non-executive Table III.
directors to total number of directors; CEODUA represents a dummy variable of 1 when the roles of CEO and Descriptive statistics
board Chairperson are held by a single individual, and 0, when separated by gender
IJMF Brooks’ (2006) findings that show that larger IPOs tend to engage more female directors.
Additionally, female directors do not invest much in R&D activities, and are less likely to sit
on the board of technology IPOs. These results are consistent with prior studies’ claim that
female directors have phobia to engage in risky investments, such as R&D activities (Chen, Ni
and Tong, 2016; Sila et al., 2016). It is also in line with findings that have revealed that the
percentage of female directors on the board of technology companies is low (Quintana-Garcia
and Benavides-Velasco, 2016; Terjesen et al., 2009).
The IPO companies with female directors on the board have higher participation of
institutional investors and have more non-executive directors as well as less CEO duality.
For instance, compared to male-led IPOs, where, on average, 31.20 per cent have a single
person as both CEO and board chair, only 18.94 per cent of IPO companies of female-led
IPOs have a single person as both the CEO and Chairman. In fact, the result shows a
significant difference at the 5 per cent level (z-value 2.05, p-value 0.04). In view of the
aforementioned evidence, the presence of female directors on the company boards at the
time of IPO can signal the value of the IPO as well as its potential to the investing
community, leading to lower IPO IR. Although the test of significant differences between the
two groups in terms of IPO IR is non-significant, to have a clearer picture of the influence of
female directors on the board of IPO companies, this study undertakes a further step to
examine the exact relationship through a multiple regression technique. Before the
regression analysis, a correlation analysis is conducted to check the collinearity among
the variables employed for regression purposes.
4.2 Correlation analysis

Table IV shows the Pearson correlation matrix of all study variables. The correlation results
reveal that IPORISK, measured as reciprocal of IPO offer price, is positively correlated with
IPO IR at the 1 per cent level of significance, meaning that the higher the degree of uncertainty
surrounding the value of an IPO, the higher the risk and the higher the IPO IR. The high IR is
to compensate investors for the risk they take in subscribing to the company’s shares. To
mitigate the degree of uncertainty, since IPO issuers are more informed about the company’s
prospects, certain signalling strategies are employed by IPO issuers. One of such is the
presence of females on the board at the time of going public. A look at Table IV indicates that
the presence of female directors on the board (FDM) is negatively correlated to IPO IR at the
5 per cent level of significance, which conforms to the signalling theory’s assumption that
presence of females as members of the board can convey some important information to
potential investors. Interestingly, the presence of female board members (FDM) has a
significantly positive correlation with board size (LNBS), which implies that for an IPO to have
a female as director, it must be of a reasonable size. However, the percentage of female
directors on the board (PFD) has no correlation with board size (LNBS). Notwithstanding, both
FDM and PFD are negatively correlated to listing days (LNLD) at the 5 per cent level of
significance. This implies that female representation on the board reduces the number of days
it may take a company to commence trading on the stock market. In sum, these results
suggest that investors’ perception of female directors on the board is likely to be positive,
leading to low level of IPO IR because their level of confidence in such companies’ potential
would be of no doubt. To further substantiate that the presence of female directors on the
board at the time of IPO is likely to convey some meaningful information to the investing
community, the present study carries out regression analyses.
4.3 Regression analysis

A hierarchical ordinary least squares (OLS) regression is employed to test the hypothesis
stated in this study since the data is cross-sectional in nature. Basic assumptions in OLS are
normality, multicollinearity and heteroskedasticity. In order to fulfil the normality
Variables 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
IR (1) 1.00
LNCA (2) −0.03 1.00
LNLD (3) −0.02 −0.06 1.00
IPORISK (4) 0.43*** −0.12* −0.05 1.00
UR (5) −0.07 0.14** −0.06 −0.30*** 1.00
AQ (6) 0.06 0.07 0.12* − 0.13* 0.09 1.00
LNTA (7) −0.01 0.34*** 0.03 −0.44*** 0.27*** 0.24*** 1.00
Z-Score (8) −0.04 −0.13* 0.00 −0.06 −0.08 −0.16** −0.35*** 1.00
TIPO (9) −0.07 −0.17*** 0.10 0.22*** −0.13** −0.09 −0.52*** 0.16** 1.00
R&D (10) −0.05 −0.17*** 0.02 0.28*** −0.04 −0.14** −0.45*** 0.14** 0.51*** 1.00
INS (11) 0.13** −0.11 −0.06 0.39*** −0.05 −0.10 −0.32*** 0.07 0.42*** 0.32*** 1.00
LNBS (12) −0.00 0.17** 0.08 −0.18*** 0.17** 0.19*** 0.32*** −0.19*** −0.15** 0.02 −0.08 1.00
PND (13) −0.08 0.19*** 0.03 −0.17*** 0.15** 0.10 0.39*** −0.14** −0.18*** −0.12* −0.01 0.11 1.00
CEODUA (14) 0.01 −0.15** −0.05 0.14** −0.10 0.01 −0.26*** 0.14** 0.18*** 0.18*** 0.01 −0.14** −0.27*** 1.00
FDM (15) −0.14** 0.07 −0.14** −0.06 0.09 0.01 0.10 −0.04 −0.02 −0.13** 0.09 0.17** 0.05 −0.14** 1.00
PFD (16) −0.09 0.02 −0.15** 0.03 0.02 0.00 0.04 0.04 −0.04 −0.12* 0.08 0.06 0.03 −0.08 0.82*** 1.00
Notes: IR represents IPO initial returns; LNCA is the natural logarithm of year of incorporation to the listing year; LNLD is the natural logarithm of the difference in days
between the listing date and the close of issue date; IPORISK is the reciprocal of IPO offer price as disclosed in the prospectus; UR is a dummy variable of 1 for reputable
underwriter, otherwise 0; AQ is a dummy variable of 1 for high quality auditor, otherwise 0; LNTA is the natural logarithm of pre-IPO total assets; Z-Score is the
continuous value derived from the Altman Z-Score model; TIPO is a dummy variable of 1 for IPOs listed in the technology industry and 0 if otherwise; R&D is the amount
of capital raised allocated to research and development; INS is the percentage of shares issued allocated to institutional investors; LNBS is the natural logarithm of the
total number of directors on each company’s board at the time of IPO; PND is the percentage of non-executive directors to total number of directors; CEODUA represents
a dummy variable of 1 when the roles of CEO and board Chairperson are held by a single individual, and 0, when separated; PFD represents the percentage of female
directors on the board at the time of IPO; FDM represents the presence of female directors on the board, which takes a binary number of 1 if an IPO company has a female
director on the board, otherwise 0. *,**,***Significant at 10, 5 and 1 per cent levels, respectively
quality
Signalling IPO
Table IV.
Correlation results
IJMF assumptions, skewed variables are normalised through the natural logarithm
transformation approach. These variables include company age, listing delay, pre-IPO
total assets and board size. Another key assumption of OLS is multicollinearity. To check
for the problem of multicollinearity among variables, variance inflation factors (VIFs) are
assessed. However, the highest figure among the VIFs of all variables considered for
regression analysis is 2.46, which is below 10. Since the VIFs for all the variables are below
10, therefore, we conclude that multicollinearity is not a problem in this study. However, a
further check on homoscedasticity of the residuals using the Breusch–Pagan test indicates
that there is heteroskedasticity problem ( χ2 is 224.79 and p-value is 0.00). To control for
heteroskedasticity, White’s heteroskedasticity-consistent standard errors is employed.
Therefore, column 6 in Table V and Table VI present the results using this approach. In
addition to the use of White’s heteroskedasticity-consistent standard errors, the present
study employs a QR technique. The QR is a flexible, powerful, comprehensive and more
robust technique. The QR is considered more reliable in handling heteroskedasticity and
normality problems (Hao and Naiman, 2007; Koenker and Bassett, 1978). This is because it
does not require strict assumptions like the OLS as to normality, homoscedasticity and
absence of outliers (Hao and Naiman, 2007; Raji et al., 2017; Ramdani and Witteloostuijn,
2010). The QR also helps to produce a comprehensive view of all the possible associations
that might exist between IPO IR and all the explanatory variables. Hence, Tables V and VI
present both the OLS and the QR results, respectively.
Panel A of Table V reports the regression results when a dummy variable of 1 is used to
represent the presence of female directors on board at the time of IPO, while Panel B presents the
results when the percentage of female directors to total board size is used as a measure of female
directors on the board. In the second column in Panel A, Table V, only the IPO issue and
company specific characteristics are regressed, while in the third column, the board-specific
corporate governance variables are added to the regression model. The fourth column shows
the complete regression model with the inclusion of the main variable of interest, i.e. the presence
of female board members (FDM). In the OLS results reported in Panel A, in terms of company,
IPO issue and board-specific corporate governance variables used as control variables, IPORISK
and LNTA, are found to have a significant and positive association with IPO IR at the 1 and
5 per cent levels, respectively. In fact, IPORISK has a 1 per cent level of significance in the robust
regression and across quantiles in the QR. However, the significance level of LNTA stops at the
lower quantile level (0.25). The significantly positive association between IPORISK and IPO IR
suggests that the higher the risk associated with an IPO, the higher the level of such IPO IR. In
contrast, a positive association between LNTA and IPO IR reveals that the large company
which is assumed to have low uncertainty and low asymmetry information has high IPO IR.
Similar to the unexpected results found between LNTA and IPO IR, Z-Score is found to have a
significant and positive association with IPO IR, meaning that IPOs with strong financial
condition produce higher IR. The level of significance appears in the robust OLS at the 10 and
1 per cent levels in the lower quantile level (0.25). In addition, percentage of IPO investment in
R&D activities is significantly and negatively associated with IPO IR in the OLS estimation and
across quantiles, except the lower quantile (0.25). This evidence suggests that potential investors
in the Malaysian IPO market view investment in R&D by IPOs as value investment that would
generate growth for the company. Such IPOs are considered to have innovative potential that
may enhance an IPO’s competitive advantage in the market place without considering the
uncertainty in the future benefits of the company’s R&D activities.
A slightly significant and positive association is found between institutional investors’
participation (INS) and IPO IR in the lower quantile level (0.25), which implies that
institutional investors’ participation in the IPO process can serve as a signal of IPO quality
and an indication that such IPO issuers have good prospects. In this case, potential investors
would subscribe to such shares, thereby causing increase in demand and first trading day
Panel A: OLS and QR results using binary value to represent female directors
Variables Expected sign OLS QR VIF
OLS OLS OLS Robust OLS 0.25 0.50 0.75
LNCA − −0.03 −0.03 −0.03 −0.03 −0.00 0.00 −0.01 1.16
LNLD − −0.00 −0.00 −0.06 −0.06 −0.07 −0.03 −0.09 1.10
IPORISK + 0.22*** 0.22*** 0.22*** 0.22*** 0.09*** 0.12*** 0.16*** 1.60
UR − 0.04 0.04 0.05 0.05 −0.09*** 0.01 0.04 1.18
AQ − 0.09 0.09 0.09 0.09 0.04 0.03 0.07 1.12
LNTA − 0.09** 0.07*** 0.07** 0.07** 0.09*** 0.04 0.01 2.46
Z-Score +/− 0.04 0.04 0.04 0.04* 0.05*** 0.04 0.06 1.25
TIPO + −0.07 −0.07 −0.06 −0.06 −0.10** −0.07 −0.09 1.82
R&D + −0.40 −0.41 −0.53** −0.53** −0.13 −0.43* −0.48* 1.63
INS − 0.06 0.07 0.11 0.11 0.12* 0.10 0.17 1.47
LNBS − 0.08 0.16 0.16 −0.05 0.03 0.26 1.26
PND − −0.22 −0.22 −0.22 −0.20** −0.18 −0.27 1.26
CEODUA − −0.02 −0.04 −0.04 −0.14*** −0.10 −0.06 1.17
FDM − −0.17*** −0.17*** −0.06* −0.10* −0.15** 1.12
Constant −1.37** −1.53** −1.44** −1.44** −1.42*** −0.82 −0.40
Mean VIF 1.40
R2 (Adjust R2)% 25 (22) 26 (21) 28 (24) 28
Pseudo R2% 14 10 14
Panel B: OLS and QR results using percentage value to represent female directors
Variables OLS QR
OLS Robust OLS 0.25 0.50 0.75
LNCA −0.03 −0.03 −0.01 0.01 −0.00
LNLD −0.05 −0.05 −0.03 −0.04 −0.13
IPORISK 0.22*** 0.22*** 0.10*** 0.11*** 0.18***
UR 0.04 0.04 −0.05 0.00 0.00
AQ 0.09 0.09 0.03 0.05 0.09
LNTA 0.07** 0.07** 0.08*** 0.04 0.04
Z-Score 0.05 0.05** 0.05** 0.04 0.06
TIPO −0.07 −0.07 −0.12* −0.06 −0.04
R&D −0.51* −0.51** −0.08 −0.39* −0.43
INS 0.10 0.10 0.07 0.12 0.07
(continued )
quality
Table V.
Signalling IPO
OLS and QR results

IJMF
Table V.
LNBS 0.12 0.12 −0.07 0.04 0.18
PND −0.21 −0.21* −0.23* −0.20 −0.11
CEODUA −0.03 −0.03 −0.15*** −0.10 −0.00
PFD −0.60** −0.60*** −0.01 −0.37* −0.55*
Constant −1.44** −1.44** −1.30** −0.71 −0.78
Mean VIF
2 2
R (Adjust R )% 28 (23) 28
Pseudo R2% 13 10 13
Notes: IR represents IPO initial returns; LNCA is the natural logarithm of year of incorporation to the listing year; LNLD is the natural logarithm of the difference in days
between the listing date and the close of issue date; IPORISK is the reciprocal of IPO offer price as disclosed in the prospectus; UR is a dummy variable of 1 for reputable
underwriter, otherwise 0; AQ is a dummy variable of 1 for high quality auditor, otherwise 0; LNTA is the natural logarithm of pre-IPO total assets; Z-Score is the
continuous value derived from the Altman Z-Score model; TIPO is a dummy variable of 1 for IPO listed in the technology industry and 0 if otherwise; R&D is the amount
of capital raised allocated to research and development; INS is the percentage of shares issued allocated to institutional investors; LNBS is the natural logarithm of the
total number of directors on each company’s board at the time of IPO; PND is the percentage of non-executive directors to total number of directors; CEODUA represents
a dummy variable of 1 when the roles of CEO and board Chairperson are held by a single individual, and 0, when separated; FDM represents the presence of female
directors on the board, which takes a binary number of 1 if an IPO company has a female director on the board, otherwise, 0. PFD represents the percentage of female
directors on the board at the time of IPO. In addition, *,**,***Significant at 10, 5 and 1 per cent levels, respectively
OLS ( female dummy) OLS (proportion of female directors)
Signalling IPO
Variables OLS Robust OLS OLS Robust OLS quality
LNCA −0.03 −0.03 −0.04 −0.04
LNLD −0.05 −0.05 −0.04 −0.04
IPORISK 0.21*** 0.21*** 0.22*** 0.22***
UR 0.04 0.04 0.03 0.03
AQ 0.11 0.11 0.12 0.12
LNTA 0.04 0.04 0.04 0.04*
Z-Score 0.04 0.04 0.04 0.04*
R&D −0.42 −0.42 −0.40 −0.40
INS 0.11 0.11 0.09 0.09
LNBS 0.10 0.10 0.06 0.06
PND −0.19 −0.19 −0.17 −0.19
CEODUA −0.01 −0.01 −0.01 −0.01
FDM −0.18*** −0.18***

PFD −0.60** −0.60***
Industry effect No No No No
Table VI.
Year effect No Yes (2008) No No OLS results after
Constant −0.84 −0.84 −0.86 −0.86 controlling for
R2 (Adjust R2)% 35 (25) 35 34(24) 34 the year and
Notes: *,**,***Significant at 10, 5 and 1 per cent levels, respectively industry effects
closing share prices. The increase in the company share prices will positively affect IPO IR.
This evidence is consistent with prior IPO studies that have documented a positive
association between institutional investors’ participation and IPO IR (Che-Yahya et al., 2017;
Sapian et al., 2013). Other variables, in particular, LNLD, UR and AQ, are found to be
insignificantly associated with IPO IR.
Regarding the board characteristics variables, Panel A of Table V (column 7) shows that
only PND and CEODUA are significantly associated with IPO IR and this is only reported in
the lower quantile (0.25) at 5 and 1 per cent levels, respectively. The significantly negative
impact of PND implies that IPOs with a reasonable percentage of non-executive directors have
lower IPO IR. This evidence is consistent with Filatotchev and Bishop’s (2002) findings that
high proportion of non-executive directors on the board reduces information asymmetry and
uncertainties surrounding the IPO that causes IPO IR. Similarly, the negative influence of
CEODUA on IPO IR may imply that the concentration of the roles of CEO and Chairperson in
a single individual could be seen by investors as a positive signal of the company’s value.
As for the variable of interest, FDM, a significant and negative association is found
across all regression estimations (OLS, robust OLS and QR). However, a strong significance
level appears more on average, which is at the 1 per cent level and in the upper quantile level
(0.75), which is 5 per cent, than in the lower and median quantile levels. These results
indicate that the presence of female directors on the board at the time of IPO tends to the
uncertainties surrounding the intrinsic value of the company and consequently reduces IPO
IR. The negative sign reported in this study is consistent with Kaur and Singh’s (2015)
findings for the Indian IPO market. However, their result appears insignificant.
To further test the robustness of this study with prior studies, such as Handa and Singh
(2015) as well as Reutzel and Belsito (2015) for the Indian and the US IPO markets, the
present study uses the percentage of female directors on the board as a measure of female
representation on the board. Based on this measurement, there are slight changes in the
results. Panel B of Table V provides the results that reflect the measure of the proportion of
female directors on the board at the time of IPO. In terms of the control variables, IPORISK
remains significant across various regression models as in Panel A of Table V. LNTA,
Z-Score, R&D activities, PND and CEODUA remain significant as in Panel A, but with some
IJMF slight changes in the significance levels. However, technology IPOs is found to have
a slightly weak and negative association with IPO IR. Regarding the focus variable (PFD),
the significance level appears strong on average with little evidence in the median (0.50) and
upper quantile (0.75) levels. This means that female directors on the board can send a signal
to the market about the company’s quality.
Following Kumar’s (2014) econometric concerns regarding IPO data, whereby all data
points are mostly independent, all companies are only entered once in the sample and thus, the
data does not form a panel. However, as data are collected over time, the time effect needs to be
captured somehow before interpreting the regression. Similarly, other differences in the data,
such as industry effect, need to be captured for better results. In accordance with Kumar’s
(2014) suggestions, the present study controls for industry and year effect in order to detect
whether or not this could affect our earlier results in Table V and to find out if there is
presence of industry and year effect in the regression model. According to the results
presented in Table VI, IPORISK maintains its significant position, while LNTA and Z-Score
are only found to have a slightly significant influence on IPO IR. Interestingly, the main
variables of interest, be it FDM or PFD, are found to be strongly associated with IPO IR. The
results show that both the presence and proportion of female directors on the board decrease
the level of IPO IR by 18 and 60 per cent, respectively, meaning that the proportion of female
directors matters more than just the presence of female directors on the board. In addition, a
significantly negative year effect is found in the regression model. This is not surprising
because this particular year of 2008 was the period of the global financial crisis. Therefore, this
study concludes that controlling for industry and year effect has a significant role to play in
the regression models. Since there is a significant year effect in 2008, the study takes a step
further to test whether the impact of female directors is stronger or weaker when there is a
financial crisis. To confirm this, an interaction between financial crisis period and female
directors’ variables (FDM and PFD) were included separately in the regression model. Based
on the regression results the significance of FDM drops from 1 per cent as earlier indicated in
Table VI to 10 per cent, whereas it is insignificant when PFD was used as a representation of
female directors. The results suggest that the influence of female directors on boards is
different (weaker) in different business cycle. This supports Lee et al.’s (2017) and Gupta et al.’s
(2013) claim that during crisis, stock market became less efficient in incorporating company
specific information into prices.
4.3.1 Robustness tests. Having reported that female directors have a significantly
negative influence on IPO IR, it is possible that the negative influence of female directors
on the board at the time of IPO passes through certain channels. For instance, certain
company or issue characteristics may lead to both lower IPO IR and more female directors
on the board. A look at the correlation results presented in Table IV shows that the
presence of female directors on the board is correlated with variables, like LNLD, which
are the number of days it takes an IPO to sell its shares, R&D activities, board size (LNBS)
and the participation of institutional investors (INS). Therefore, these variables may
provide the channels through which female directors can influence IPO IR.
To capture whether or not the effect of these variables can weaken the influence of
female directors on IPO IR, the study interacts R&D activities and the participation of
institutional investors with female directors and tests their influence on IPO IR. These
variables are considered for the following reasons: an IPO’s R&D activity can both
indicate the risk-taking policy of the company and the uncertainties surrounding the value
of the company; and the participation of institutional investors may provide an important
signal of the governance mechanisms put in place by the company and the future growth
prospects of the company. In line with the aforementioned arguments, the impact of
female directors on IPO returns may be stronger or weaker when the R&D intensity
(institutional ownership) is higher or lower. Based on this notion, the results presented in
Table VII reveal that the significant impact of female directors is channelled through the Signalling IPO
institutional ownership not the R&D. quality
4.3.2 Analysis of endogeneity. To test whether or not the results presented in Table V are
robust to endogeneity bias, this study applies the propensity score matching estimation. Based
on the estimation, the control sample is obtained through a logistic regression using the right
hand side variables in model 1. The logistic regression results as presented in Table VIII show
that the number of days between listing date and closing date of the issue (LNLD), the R&D
activities, institutional investors’ participation (INS) and board size (LNBS) have significant
association with the female directors’ presence on the board at the time of IPO. The results
show that IPOs with large board size and higher institutional participation are likely to have
female directors on the board, while boards that allocate a higher amount of IPO proceeds for
R&D activities and more days before closing the issue are less likely to have female directors
on the board. In addition to the logistic regression results, the average treatment effect on the
treated (ATT) estimation with radius matching method analytical standard errors reveals that
there is a significantly negative difference (t-value ¼ −2.73) between the treatment and control
groups. The results suggest that IPOs with female directors on the board have lower IPO IR,
which is consistent with the earlier results presented in Table V. This implies that the results
presented earlier on the negative influence of female directors on IPO IR do not suffer from
endogeneity bias.
Having presented in Table VIII that female director on board is unique to companies’
characteristics, a mean comparison test was conducted on whether the characteristics of the
treatment and control group are significantly different. The results provided in Table IX show a
significantly positive difference between the treatment and control group from the aspect of CEO
duality and R&D. In fact, companies in the treatment group allocated less amount of capital
raised for R&D and have fewer cases where the CEO is also the chairman of the company.
5. Discussion and conclusion

One of the basic problems in the IPO market is the uncertainties surrounding the IPO value,
which result in information asymmetry between IPO issuers and potential investors. The
Variables R&D effects Institutional investors effects R&D and institutional investors effects
LNCA −0.03 −0.03 −0.03

LNLD −0.07 −0.02 −0.03
IPORISK 0.22*** 0.22*** 0.22***
UR 0.05 0.05 0.05
AQ 0.08 0.08 0.08
LNTA 0.06** 0.07** 0.06**
Z-Score 0.04* 0.04* 0.04*
R&D −0.40 −0.53** −0.47
TIPO −0.04 −0.07 −0.06
INS 0.10 0.26* 0.24
LNBS 0.15 0.14 0.14
PND −0.21 −0.20 −0.20
CEODUA −0.04 −0.04 −0.04
FDM −0.12* 0.02 0.02
FDM×R&D −0.53 −0.23
FDM×INS −0.38** −0.34*
Constant −1.38* −1.61** −1.57**
R2 (Adjust R2)% 29 (24) 30 (24) 30 (24) Table VII.
Notes: *,**,***Significant at 10, 5 and 1 per cent levels, respectively Interacting effects
IJMF Panel A: logistic regression results for the propensity score matching estimation using Female directors as the
dependent variable
Variables Coefficients value
LNCA −0.01
LNLD −1.54**
IPORISK −0.03
UR 0.23
AQ −0.06
LNTA 0.01
Z-Score 0.04
TIPO 0.49
R&D −3.31**
INS 0.99*
LNBS 1.98***
PND −0.15
CEODUA −0.52
Constant 0.34
Number of observations 220
Pseudo R2 9
Panel B: ATT estimation with radius matching method analytical standard errors
No of observations in the treatment group No of observations in the control group ATT SE t-value
95 125 −0.19 0.07 −2.73
Table VIII. Notes: The numbers of treated and controls refer to actual matches within the radius. The treatment group
Propensity score represents IPOs that have the presence of female directors on the board, while the control group represents
matching results IPOs with no female directors present on the board at the time of IPO
Mean
Variables Treatment Control t-statistics/p-value
CA 6.19 5.56 −0.70 (0.76)

IPORISK 1.77 1.92 0.85 (0.20)
UR 48.42 39.20 −1.37 (0.91)
AQ 42.11 40.80 −0.19 (0.58)
TA 610.12 255.84 −1.23 (0.89)
Z-Score 1.89 1.97 0.52 (0.30)
TIPO 24.21 26.40 0.37 (0.36)
R&D 7.25 10.97 1.97 (0.03)
INS 50.97 45.37 −1.37 (0.91)
BS 7.11 6.64 −2.27 (0.98)
Table IX.
Mean difference test PND 61.54 59.72 −0.67 (0.75)
between treatment CEODUA 18.95 31.20 2.07 (0.02)
group and Notes: The treatment group represents IPOs that have the presence of female directors on the board, while
control group the control group represents IPOs with no female directors present on the board at the time of IPO
presence of information asymmetry requires potential investors to price-protect themselves

by either looking for an IPO with higher IR or perhaps even refusing to buy the IPO shares.
In a situation where a high level of information asymmetry exists, an IPO issuer would do
everything possible to mitigate the level of information asymmetry in order to reduce IPO
IR. Potential investors would also search for information that can be used as signals to make
judgment based on observable characteristics of the IPO issuer in terms of quality and
viability since it is believed that issuers have information about their future growth
prospects (Certo, 2003; Sanders and Boivie, 2004). Therefore, this study applies the
signalling theory to test whether or not having female directors on the board at the time of Signalling IPO
IPO, communicates credible signals regarding the company. quality
In line with the signalling theory’s assertion, this study finds that the presence of
female directors on the board, i.e. when at least one female director is on the board at the
time of IPO, is negatively associated with IPO IR. Similarly, the proportion of female
directors on the board at the time of the IPO is found to be negatively associated with IPO
IR. However, it appears the strongest results are obtained when the presence of female
directors is used as a measure of female representation on the board. In the median and
upper quantiles which relate to IPOs with extremely high IR, the presence of female
directors on the board at the time of IPO remains significant, whereas no significant
influence of proportion of female directors on IPO IR can be found. For this reason, the
study cannot lay claim that the higher the proportion of female directors, the lower the IPO
IR; rather, the study suggests that the presence of female directors on the board at the time
of IPO leads to reduction in IPO IR as pointed out by the signalling theory. This evidence
indicates that potential investors assign more importance to gender composition of the
board of directors of IPO companies when making investment decision (McGuinness,
2018). The findings support Welbourne’s (1999) argument that female presence on the
board at the time of IPO can be viewed as a signal of IPO quality, which reduces the
uncertainties surrounding the IPO valuation in the minds of investors as well as mitigates
information asymmetry, thus leading to reduction in IPO IR.
The findings also pinpoint that having women as board members at the time of IPO can
serve as a signal of corporate governance, an indication of an appropriate board that can
enhance a company’s reputation and strengthen its capability to be more profitable (Burke,
2003; Certo, 2003; Quintana-Garcia and Benavides-Velasco, 2016). On this note, it can be
argued that female directors’ presence on the board provides several signals to the investing
community. Such signals include board competence (McGuinness, 2018), the ability of the
board to generate capital in the public market (Hillman et al., 2007) and the board’s capacity
to provide better monitoring and governance after being listed (Adams and Ferreira, 2009).
Most importantly, the results clarify the ambiguity in terms of the association between
female directors and IPO IR as documented by prior studies in the US (Reutzel and Belsito,
2015), Hong Kong (McGuinness, 2018) and Indian IPO markets (Handa and Singh, 2015;
Kaur and Singh, 2015). In fact, the results further indicate that female directors on the board
are a better signal of IPO quality than other board variables, such as board size,
non-executive directors and CEO duality. Finally, the findings from this study lend support
to the argument in extant literature that gender diversity influences corporate outcomes,
such as financial performance and board monitoring effectiveness. Therefore, this study
adds IPO IR as one of the corporate outcomes that gender diversity can explain. The overall
evidence from this study lends support to the signalling theory, as it indicates that IPO
investors can consider female directors on the board at the time of IPO as an important
signal of IPO quality. For this reason, it would be of interest to companies aiming to raise
capital through IPO to consider appointing female directors on the board because it seems
that investors attach more importance to gender composition of a company when making
investment decisions.
Notes
1. IPO underpricing is the difference between the closing price of a company’s shares on the first
trading day and the offer price (Ritter and Welch, 2002).
2. A typical example is the study of Badru et al. (2019), which reveals that women directors are
positively associated with the allocation of capital raised for growth opportunities.
3. Binti means daughter of a person, while Bin means son of a person.
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Corresponding author
Bazeet Olayemi Badru can be contacted at: bazeetolayemi@gmail.com; badru@uum.edu.my
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International Journal of Managerial Finance

Signalling IPO quality through female directors

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2. Literature review and hypothesis development

3.2 Variables of the study

Variables Mean Med Max Min SD Skewness Kurtosis

Gender No. of director positions No. of companies Mean Min Max

Table II. Distribution of female directors on the board

Mean Median Max

IR 20.36 6.60 7.89 4.55 404.17 127.27 1.18 (0.24)

4.2 Correlation analysis

4.3 Regression analysis

OLS and QR results

FDM −0.18*** −0.18***

5. Discussion and conclusion

LNCA −0.03 −0.03 −0.03

CA 6.19 5.56 −0.70 (0.76)

presence of information asymmetry requires potential investors to price-protect themselves

Finance, Vol. 13 No. 1, pp. 108-113.

Journal of Business & Accounting, Vol. 10 No. 1, pp. 127-165.

crisis?”, Economic Research – Ekonomska istraživanja, Vol. 30 No. 1, pp. 1339-1366.

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FDM −0.18* −0.18*