Analysis of Underpricing in the Malaysian New Issues Market During 1975-1990: Are New Issues Excessively Underpriced?

Abstract

A total of about RM10 billion, which is equal to 120 percent of Malaysian gross national savings, was raised in 1992 through sale of shares by ‘companies that were listed as new issues on Kuala Lumpur Stock Exchange (KLSE). The average oversubscription for new issues during 1975 #1990 is 35 times the offered tranche, which works out, for an average applicant, to a mere Shree percent chance of being allocated. Investors and speculators believe that new issues generate Sucrative and assured returns. This is evidenced by a record number of 56 new issues consisting of 12 on the Main Board and 44 on the Second Board being listed in 1993. Chasing after these sew issues is considered a prudent investment behaviour. This perception is also reinforced By reported findings that in Malaysia new issues are underpriced 7.5 times the average normal setums in the stock market. How accurate is this common perception of excessive underpricing?