Academic journal article International Journal of Business and Society

Ipo Underpricing and Aftermarket Liquidity: Evidence from Malaysia

Academic journal article International Journal of Business and Society

Ipo Underpricing and Aftermarket Liquidity: Evidence from Malaysia

Article excerpt


This study empirically examines the influence of underpricing on the aftermarket liquidity of 191 initial public offerings (IPOs) that are listed on Bursa Malaysia, an emerging stock market in the South-East Asia, from June 2003 to December 2008. This hypothesized effect is based on the liquidity theory which posits that underpricing contributes to the higher level of aftermarket liquidity. Despite the focus on only underpriced IPOs, the preliminary results are still consistent with those of the recent studies in reporting dramatically low initial returns particularly in 2008, the year that witnesses the sub-prime financial crisis in the United States. The multiple regression results indicate that there exists a significantly positive relationship between Malaysian IPO under-pricing and the level of IPO liquidity in the secondary market. This finding implies that the issuers' decision to underprice pays off. Even though they receive less new capital than they would otherwise have, their highly liquid shares have greater chances of survival in the secondary market and so do the future seasoned equity offerings.

Keywords: Initial Public Offerings; Aftermarket liquidity; Underpricing; Malaysian IPO market

(ProQuest: ... denotes formulae omitted.)


A listing status from a stock exchange is a significant event in the life cycle of a competitive firm as it flags a great achievement and persistent quality. However, what are the factors that motivate owners of a firm to get their firm listed? According to Zingales (1995), the listing allows the original owners to liquidate their interest in the firm and recapture their initial investments. Mikkelson, Partch and Shah. (1997) meanwhile suggest that in addition to attaining liquidity on their stock interest, the listing also allows the original owners to raise a large pool of funds for investment and growth purposes.

If liquidity is the driving force that motivates firm owners to list their IPOs, what are the benefits to these owners from having shares that are highly liquid? Previous studies argue that the value of liquidity could differ from one firm's owner to another. For instance, Hahn and Ligon (2006) suggest that shares that are highly liquid allow the remaining shares to be traded at prices that generate greater returns. Whereas, Ellul and Pagano (2006) argue that investors are content with a lower required rate of returns on highly liquid IPOs, allowing issuers to offer the new shares at highest or optimal prices. From yet another perspective, issuers of highly liquid shares are believed to have the tendency to issue subsequent seasoned equity offerings (SEO) at lower floatation costs. This proposition is based on a study by Butler et al. (2005) which finds that ceteris paribus, investment bank fees for SEOs are significantly lower for firms that have highly liquid IPOs than those whose IPOs are less liquid. Their findings suggest firms can reduce their floatation costs of raising external funds by improving the liquidity of their outstanding shares.

The existing evidence on the relationship between liquidity and underpricing is far from conclusive particularly because most are established from the developed markets. One of the first studies, which is conducted by Booth and Chua (1996), suggests that a disperse ownership is the mediator in the positive relationship between IPO underpricing and aftermarket liquidity. They also claim that investment banks purposely underprice the IPOs to create a broad initial ownership dispersion that eventually increases the level of aftermarket liquidity of the new issues. The results of the other studies also show that there is a positive relationship between underpricing and IPO liquidity in the secondary market. In other words, highly underpriced IPOs tend to show a higher level of liquidity in the secondary market (Hahn and Ligon, 2006; Pham et al., 2003; Zheng and Li, 2008). …

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