Relationship between prestige signals and over-subscription ratio: Evidence from Malaysian initial public offerings

Research output: Contribution to journalArticle

Abstract

Purpose: The purpose of this paper is to examine whether initial public offering (IPO) over-subscription is a function of firm’s prestige signals conveyed by third parties with reputational capital such as underwriter, auditor and independent non-executive board member. Design/methodology/approach: The relationship between prestige signals and over-subscription ratio (OSR) of IPOs is analysed using a cross-sectional regression based on a sample of 393 IPOs issued between January 2000 and December 2015. Findings: The results indicate that IPOs underwritten by reputable underwriters have lower OSR than those underwritten by non-reputable underwriters. While issuer engages reputable underwriter to certify firm quality to reduce information asymmetry, the action brings with it lower initial returns for its IPO. Investors interpret the signal conveyed by issuer’s choice of underwriter from under-pricing perspective and respond accordingly by reducing IPO demand. This implies that investors regard under-pricing as a more valuable signal than firm quality signal associated with underwriter reputation. The findings also indicate that over-subscription increases in IPOs that have above average initial returns and higher institutional participation. Issuing firms that go public in a period of high IPO volume are associated with low OSR. Originality/value: This is the first paper to examine the relationship between the prestige signals and OSR of IPOs in the Malaysian context.

Original languageEnglish
JournalInternational Journal of Managerial Finance
DOIs
Publication statusPublished - 1 Jan 2019

Fingerprint

Prestige
Initial public offerings
Subscription
Underwriters
Underpricing
Investors
Design methodology
Underwriter reputation
Information asymmetry
Auditors
Participation
Cross-sectional regression
Quality signal

Keywords

  • Fixed-price mechanism
  • Information asymmetry
  • Initial public offering
  • Over-subscription ratio
  • Prestige signals

ASJC Scopus subject areas

  • Business, Management and Accounting (miscellaneous)
  • Finance

Cite this

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title = "Relationship between prestige signals and over-subscription ratio: Evidence from Malaysian initial public offerings",
abstract = "Purpose: The purpose of this paper is to examine whether initial public offering (IPO) over-subscription is a function of firm’s prestige signals conveyed by third parties with reputational capital such as underwriter, auditor and independent non-executive board member. Design/methodology/approach: The relationship between prestige signals and over-subscription ratio (OSR) of IPOs is analysed using a cross-sectional regression based on a sample of 393 IPOs issued between January 2000 and December 2015. Findings: The results indicate that IPOs underwritten by reputable underwriters have lower OSR than those underwritten by non-reputable underwriters. While issuer engages reputable underwriter to certify firm quality to reduce information asymmetry, the action brings with it lower initial returns for its IPO. Investors interpret the signal conveyed by issuer’s choice of underwriter from under-pricing perspective and respond accordingly by reducing IPO demand. This implies that investors regard under-pricing as a more valuable signal than firm quality signal associated with underwriter reputation. The findings also indicate that over-subscription increases in IPOs that have above average initial returns and higher institutional participation. Issuing firms that go public in a period of high IPO volume are associated with low OSR. Originality/value: This is the first paper to examine the relationship between the prestige signals and OSR of IPOs in the Malaysian context.",
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author = "Ali Albada and Othman Yong and Low, {Soo Wah}",
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AB - Purpose: The purpose of this paper is to examine whether initial public offering (IPO) over-subscription is a function of firm’s prestige signals conveyed by third parties with reputational capital such as underwriter, auditor and independent non-executive board member. Design/methodology/approach: The relationship between prestige signals and over-subscription ratio (OSR) of IPOs is analysed using a cross-sectional regression based on a sample of 393 IPOs issued between January 2000 and December 2015. Findings: The results indicate that IPOs underwritten by reputable underwriters have lower OSR than those underwritten by non-reputable underwriters. While issuer engages reputable underwriter to certify firm quality to reduce information asymmetry, the action brings with it lower initial returns for its IPO. Investors interpret the signal conveyed by issuer’s choice of underwriter from under-pricing perspective and respond accordingly by reducing IPO demand. This implies that investors regard under-pricing as a more valuable signal than firm quality signal associated with underwriter reputation. The findings also indicate that over-subscription increases in IPOs that have above average initial returns and higher institutional participation. Issuing firms that go public in a period of high IPO volume are associated with low OSR. Originality/value: This is the first paper to examine the relationship between the prestige signals and OSR of IPOs in the Malaysian context.

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