Measuring The Costs of IPO Underpricing- The Original Shareholders’ View

Abstract

Underpriced initial public offers (IPOs), which include all but 4 of the 223 Malaysian IPOs during the 15 year period from 1979 through 1993, create gains for the new investors when trading begins and offsetting losses for some, but not all, of the original shareholders. When the IPO is a public offer of new shares, the amount of the original shareholders’ loss depends on (1) the level of underpricing and (2) the size of the offer. When the IPO is an offer for sale by just some of the owners of existing shares, the loss in addition depends on (3) whether or not the original shareholder participates as a seller. In a public offer the loss from IPO underpricing is shared by all the original shareholders, but in an offer for sale it is borne entirely by the selling shareholders. On average during 1979 through 1993, IPOs involving offers for sale of existing shares had less underpricing and were smaller in size than public offers of new shares. Nevertheless, it was the original shareholders selling shares in offers for sale who incurred the greatest loss from IPO underpricing, 32.5 percent on average compared to 13.6 percent for public offers, while the original shareholders who did not participate in the offer for sale incurred no loss at all from the underpricing.