Regulations and Underpricing of IPOs

Abstract

Abstract: The IPO market in Malaysia has historically been tightly regulated. However, with the formation of the Securities Commission (SC) in 1993, the regulations have eased slowly. This paper investigates the relationship between underpricing and regulations by looking at 546 IPOs from 1990 to 2002. Underpricing refers to the initial return that an investor earns if he buys shares of the IPO at the offer price and sells it at the end of the listing day at the market price. Regulations are measured by the relaxation of the pricing method, the required allocation to indigenous investors, the mechanisms to protect minority shareholders, and the length of time periods. The first three features of regulations are unique to Malaysia. The findings are mixed regarding the relaxation of the pricing guideline in 1995 since it did not lead to lower underpricing for the period from 1996 to 7 November, 1997 or before the Asian financial crisis. The fraction of shares set aside for indigenous investors does not affect underpricing: length of time from price setting to listing date related negatively to underpricing. Finally, the protective mechanisms led to more underpricing for firms that went public between 1996 and 6 November, 1997 or those that went public after 1998, that is, after the Asian financial crisis.