Who Actually Did Gain From The Underpricing of IPO’s

Abstract

“The existence of underpricing for initial public offerings (IPOs) of stocks in the advanced markets a the West is well documented in literature. This paper presents the levels of underpricing for 10s in Malaysia over a more recent period than documented in prior studies. IPO are examined = the present study over the period January 1990 to December 1994, a period where IPOs are ‘offered in record number, a total of over 220 issues. Unlike previous studies on the Malaysian IPOs, this study further narrows the initial return horizon by dividing the return on the first day of szading into an opening price (offer-to-open) retum and an intraday (open-to-close) retum, in ‘onder to determine who actually gains from IPO underpricing, i.e., whether the benefits of under- icing accrue almost entirely to the subscribers or the secondary market traders may also partici- patein the return. This paper also focuses on the possible explanations for the levels of underpricing secorded, based on the size of the company, and the oversubscription ratio. Using a sample of 224 TPO; listed on the Kuala Lumpur Stock Exchange (KLSE) from January 1990 to December 1994, this study documents an average initial (offer-to-open) return of 72.849 percent (72.634 percent adjusted return), an average substantially lower than those found in earlier studies on the KLSE. The average oversubscription ratio of 32.318 times s also lower than those those found in earlier studies. Overall, both mean returns and adjusted mean returns indicate that benefits of under- pricing do not accrue to the secondary market traders, either on the first day or seven days later. This is consistent with the results of a study by Barry and Jennings (1993) on the US markets (NYSE, AMEX and OTC firms). Initial observation seems t indicate that small companies (paid-up capital less than RM20 million) and large companies (paid-up capital larger than RM100 million) have mean returns lower than the medium sized companies (paid-up capital between RM20 mil- tion and RMI100 million). Standard deviation of returns tend to increase with the increase in. the size of company. However, statistically speaking, size of company is not signifi-