Prestige signals and heterogeneity of opinion regarding IPO values: Malaysian evidence

Research output: Contribution to journalArticle

Abstract

Purpose: The purpose of this paper is to examine the effects of prestige signals measured by the reputations of the underwriter, auditor and board size on the heterogeneity of investor belief about the true value of IPO in the Malaysian IPO market. Design/methodology/approach: This study employs a sample of 281 IPOs issued between January 2000 and December 2015. The relationship between prestige signals and investor heterogeneity, measured by first-day price range of IPOs, is analysed using cross-sectional regression and quantile regression technique. Findings: Of the three prestige signals, the findings show that only underwriter reputation and board size have significant negative relationships with IPO first-day price range. This implies that IPOs underwritten by reputable underwriters and issuing firms with larger board members have lower heterogeneity of opinion among investors. The findings also show that underwriter and auditor reputations have negative relationship with IPO initial return, suggesting that these prestige signals help to reduce IPO under-pricing, which is a direct cost of raising capital for the issuing firm. Furthermore, the results indicate that offer price, initial return, over-subscription ratio and private placement are associated with higher first-day price range. However, the findings on offer size suggest that larger IPO offer size is associated with lower first-day price range. Overall, the findings suggest that firm’s prestige signals reduce opinion heterogeneity among investors and that lower investors’ heterogeneity leads to lower IPO under-pricing cost for issuing firms. Originality/value: Despite the importance of underwriter, auditor and board member reputations in signalling firm’s quality and reducing the level of information asymmetry of the listing firm’s issues, research on the effects of prestige signals on investor heterogeneity remains unexplored. This study investigates the role of prestige signals in influencing investors’ heterogeneity in Malaysia. The authors conjecture that underwriter, auditor and board member with higher reputations are associated with lower levels of opinion heterogeneity among IPO investors.

Original languageEnglish
JournalInternational Journal of Emerging Markets
DOIs
Publication statusAccepted/In press - 1 Jan 2019

Fingerprint

Prestige
Investors
Underwriters
Auditors
Underwriter reputation
Board size
Costs
Asymmetry of information
Underpricing
Quantile regression
Research issues
Private placement
Subscription
Cross-sectional regression
Malaysia
Auditor reputation
Design methodology

Keywords

  • First-day price range
  • Fixed-price mechanism
  • Heterogeneity of opinion
  • Initial public offerings (IPOs)
  • Prestige signals
  • Quantile regression

ASJC Scopus subject areas

  • Business, Management and Accounting(all)

Cite this

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title = "Prestige signals and heterogeneity of opinion regarding IPO values: Malaysian evidence",
abstract = "Purpose: The purpose of this paper is to examine the effects of prestige signals measured by the reputations of the underwriter, auditor and board size on the heterogeneity of investor belief about the true value of IPO in the Malaysian IPO market. Design/methodology/approach: This study employs a sample of 281 IPOs issued between January 2000 and December 2015. The relationship between prestige signals and investor heterogeneity, measured by first-day price range of IPOs, is analysed using cross-sectional regression and quantile regression technique. Findings: Of the three prestige signals, the findings show that only underwriter reputation and board size have significant negative relationships with IPO first-day price range. This implies that IPOs underwritten by reputable underwriters and issuing firms with larger board members have lower heterogeneity of opinion among investors. The findings also show that underwriter and auditor reputations have negative relationship with IPO initial return, suggesting that these prestige signals help to reduce IPO under-pricing, which is a direct cost of raising capital for the issuing firm. Furthermore, the results indicate that offer price, initial return, over-subscription ratio and private placement are associated with higher first-day price range. However, the findings on offer size suggest that larger IPO offer size is associated with lower first-day price range. Overall, the findings suggest that firm’s prestige signals reduce opinion heterogeneity among investors and that lower investors’ heterogeneity leads to lower IPO under-pricing cost for issuing firms. Originality/value: Despite the importance of underwriter, auditor and board member reputations in signalling firm’s quality and reducing the level of information asymmetry of the listing firm’s issues, research on the effects of prestige signals on investor heterogeneity remains unexplored. This study investigates the role of prestige signals in influencing investors’ heterogeneity in Malaysia. The authors conjecture that underwriter, auditor and board member with higher reputations are associated with lower levels of opinion heterogeneity among IPO investors.",
keywords = "First-day price range, Fixed-price mechanism, Heterogeneity of opinion, Initial public offerings (IPOs), Prestige signals, Quantile regression",
author = "Ali Albada and Low, {Soo Wah} and Othman Yong",
year = "2019",
month = "1",
day = "1",
doi = "10.1108/IJOEM-04-2018-0170",
language = "English",
journal = "International Journal of Emerging Markets",
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