Shariah-compliant status and investors’ demand for IPOs: the effects of information asymmetry

Abstract

Purpose

The purpose of this paper is to investigate the effects of Shariah-compliant status and the presence of information asymmetry on investors’ demand for initial public offerings (IPOs) in Malaysia.

Design/methodology/approach

The data regarding 260 IPOs dated for a duration of 11 years were acquired from the websites of Bursa Malaysia and Malaysian Issuing House. In evaluating the association between IPO oversubscription and the independent variables in this study, multivariate and quantile regression analyses were implemented.

Findings

It was found that Shariah-compliant status (DSHARIAH) had a significant positive relationship with IPO oversubscription. With this, it was indicated that Shariah-compliant status gains investors’ interests in subscribing to IPOs as these shares could be distributed to a wider group of investors. In the case of the proxies of information asymmetry, although firm size posed significant effects on IPO oversubscription, the effects were negative. Meanwhile, institutional investors posed significant positive effects on IPO oversubscription. Furthermore, it was indicated from the negative effects of firm size that less subscription is received by large firms which are perceived to possess lower information asymmetry from the investors. This is owing to the less underpricing provided by the issuers for their IPOs. However, it was indicated from the significant positive association between institutional investors and IPO oversubscription that the participation in the IPO among institutional investors would enhance the enthusiasm of investors for a specific stock and increase the probability of IPO oversubscription. With this, the winner’s curse hypothesis was supported.

Research limitations/implications

It is recommended that future studies investigate the compliance aspect, specifically the financial and nonfinancial aspects which may affect investors’ decision-making process for their investment.

Practical implications

With the availability of this study’s indicators in the prospectus, the findings of this study have provided useful insights for an issuer and underwriter to ensure a good subscription of its issuance.

Social implications

The findings of this study have provided further comprehension to investors regarding the essential information found in the prospectus during the decision-making process done for IPO subscription.

Originality/value

To the best of the authors’ knowledge, this is one of the first articles which have proven the effects of Shariah-compliant status and the presence of information asymmetry on IPO investors’ demand.