Initial returns of Malaysian IPOs and

Shari'a-compliant status
Ruzita Abdul Rahim Othman Yong

Hani Kalsom binti Hashim

PURPOSE OF STUDY
There are two purposes of this study:
Investigate the initial return patterns of Malaysian initial
public offerings (IPOs)
To explore whether sharia-compliant status would alter
such patterns.

SAMPLE AND DATA

The data required:
Offer prices, first trading day opening and closing prices, OSR,
units offered, types of offer, and listing board.
Provide a pool of 386 IPOs, 94.84 % of the total 407 IPOs that
were actually issued from 1999-2007 in this study.

Data are compiled from Investors Digest, web sites of

Bursa Malaysia and various securities management
firms such as the OSK and the Malaysian Investment
House as well as the STAR newspaper

RESEARCH PROBLEM
This research demonstrates few research about
underpricing of initial public offerings (IPOs) of
stocks that had consider the phenomenon as a
universal. This phenomenon included Asian
markets where underpricing in China is
exceptionally high compared to Malaysia has been
known overwhelmingly high.

RESEARCH METHOD
Author analyzed a sample of 386 IPOs issued between
January 1999 and December 2007 for the effect of
Sharia-compliant status on the patterns of initial return
of IPOs.
Based on Yong (2007b), who excludes IPO issuances
that are exclusively from such types of offers.
This study also excludes IPOs with incomplete data for
the final selection of the sample IPOs.

RESEARCH METHOD
According to the status of sharia compliance of
the issuing companies sample is classified into
two sub-samples.
333 sharia-compliant. (86.27%sharia-compliant companies listed in Bursa
Malaysia 2007)

53 non-sharia-compliant IPOs.

RESEARCH METHOD
Calculate the initial returns (IPORTN) for the i th
IPO as

PO = offer price
Pl = opening price on the
first listing day of the ith IPOs.

RESEARCH METHOD

Hypothesize...
+ve relationship between demand for the
new issues and
returns to the investors.

adopting method by Bradley and Jordan

(2002), the risk of the IPOs (IPORISK) is
calculated
as the reciprocal of the IPO offer price that
is

Hypothesize
offer size affects initial returns negatively,
considering the pressure on the first day
prices is less intense, as greater supply
allows
more subscriptions to be satisfied

Following the risk-return trade-off,

they hypothesize a positive
relationship between risks
and returns to investors.

negative relationship between company

size and returns to investors

To quantify the role of the five

predictor variables on initial returns of
IPOs, author performs cross-sectional
multiple regression, which generally is
estimated using
the following linear regression to
determine which (if any) of the
predictor variables
has a significant role in explaining
initial returns on the sharia IPOs,
separately from
the non-sharia IPOs.

Variable
Independent variable
demand factor (DEMAND)
Offer size (OFSIZE)
Risk of IPO as calculated in equation (IPORISK)

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