Initial returns of Malaysian IPOs and Shariah-compliant status

Abstract

This paper investigates the initial return patterns of the Malaysian IPOs and whether Shariah-compliant rules would alter such patterns. Using a sample of 386 IPOs issued between January 1999 and December 2007, we find initial results which indicate that initial returns of Malaysian IPOs drop substantially in the aftermath of the 1997/98 Asian financial crisis. From 94.91 % reported from the pre-crisis period of 1990 to 1998 as reported by Yong and Isa (2003), the average initial returns drop to 31.99%, a level more comparable to that reported in advanced markets. While the dramatic drop in i 998 could be associated with the crisis, the. initial returns in the following years are persistently lower. This finding suggests that the new trend is contributed by factors other than the crisis, one of which is the 1996 pricing liberalization. The results of regression analyses, however, suggest that there is no drastic change with respect to factors that drive initial returns in Malaysian IPOs. Regardless of Shari ah-compliant status of the issuing companies, initial returns of Malaysian IPOs are consistently and significantly explained by demand factor ( over-subscription ratio). The only distinct feature of the Shariah-compliant IPOs is that their initial returns are positively associated with a particular type of offer, i.e. public issue.