Initial Returns of Shariah-Compliant IPOs in Malaysia

Abstract

Abstract: This paper investigates the initial returns of Malaysian Shariah-compliant IPOs comprising 86 per cent of the overall 386 Malaysian IPOs issued) between January 1999 and December 2007. Our preliminary results indicate that initial returns and other profiles of the Shariah IPOs, to a great extent, match those of the overall IPOs. Initial returns of Malaysian IPOs dropped substantially to 31 per cent from 95 per cent reported from the pre-crisis period of 1990 to 1998, a level more comparable to that reported in advanced markets. Despite the drastic change in the level of IPO under-pricing, the results of regression analyses show that initial returns are still driven by the same factors found in the earlier study. Specifically, initial returns of Shariah-compliant IPOs in Malaysia are found to be consistently and significantly explained by an over-subscription ratio. Overall, the finding of this study suggests that initial returns of the Shariah-compliant IPOs are driven by demand rather than the supply factor.