SIGNIFICANCE OF INVESTOR DEMAND, FIRM SIZE, OFFER TYPE AND OFFER SIZE ON THE INITIAL PREMIUM, FIRST-DAY PRICE SPREAD AND FLIPPING ACTIVITY OF MALAYSIAN IPOS

This paper examines the significance of some ex-ante variables on the initial premium of Malaysian IPOs and the immediate aftermarket behavior of investors during the period January 2004 to December 2007. Overall, there is a positive relationship between investor demand and initial premium, but only the Main Board registers a strong relationship between the investor demand and flipping. Firm size is inversely related to initial premium, flipping activity and price spread. The existence of private placement in an IPO seems to induce a bandwagon effect which later results in high opening-day price spread and high flipping activities. Investor demand, in the absence of informed investors, results in a more divergent opinion regarding the true value of an IPO. Main Board, Second Board and non-private placement IPOs register a negative relationship between offer size and initial premium. In general, there is a significant negative relationship between offer size and flipping ratio. In recent years, there has been an increasing interest in studying investors' aftermarket trading behavior in the Initial Public Offerings (IPOs), especially in the developed markets in the West. This interest is believed to have been prompted by the resurgence of behavioral finance. Behavioral finance surfaced in the 1990's due to the inability of the efficient market hypothesis (EMH) in explaining anomalies and the implications that investors' behavior have in determining the true value of an investment. From the perspective of the behavioral finance, every investor is considered unique and thus homogeneity of opinion is not possible. This means that every investor has a tendency to make a different estimate of expected return from his investment. Miller (1977) suggests that the difference in opinion, regarding the expected returns for the IPOs, is especially high due to the lack of information track records at time of the new issue. The importance of information and the implications of the existence of the informed and the uninformed groups have constituted a large portion of the IPO literatures in the past, such as Ibbotson (1975), Miller (1977), Baron (1982), Rock (1986), Beatty and Ritter (1986), Grinblatt and Hwang (1989), Ritter (1991), and Welch (1992). These studies usually model their research on the information asymmetries and they use ex-ante factors as proxies for pre- listing information on IPO quality that subsequently determine the IPO performance. It is usually argued that, since behavior is affected by the opinions or expectations formed after processing the information available, ex-ante variables can be used to gauge their ability in predicting the immediate aftermarket investors' behavior. We can argue that, since behavior is driven by expectations and expectations are formed based on the information available to the prospective investors, studies based on some ex-ante information are therefore useful to the investors in helping them to formulate their investment decision in IPOs. Following this line of argument, we intend to study the relationship between four known ex-ante variables, i.e. over-subscription ratio (proxy for investor