Price behavior around earning announcement of newly listed shared

Abstract

Oversubcription for new equity issues has become a common phenomena in the Malaysian capital market. The strong public support to these new equity issues is mainly due to the high expected return predicted by the investors. Studies conducted on Malaysian capital market and those in other countries have shown that investors would most likely make excess returns on their investments not just on the initial listing but also thereafter. In the local scene, Ku Ismail, Abidin and Zainuddin (1993) finds that excess returns ranged from 19.74% (for hotel) to 125% (for industrial and commercial).

The investors' prediction on the amount of the excess returns that they would make from the IPOs' sharesis based on several factors and one of them is the forecasted earnings published in the prospectus. Several studies have been conducted to investigate the accuracy of profit forecasts made by the management of the companies in various countries including Malaysia. A study by Shamser et al. (1994) done on Malaysian companies indicates that companies seeking new listing tend to make forecasting errors in their profits. The errors may be due to the difficulties encountered by the companies when estimating future profits. However, the study also indicates that the companies seeking new listing on the KLSE had a low level of forecasting error compared to those in the developed countries such as the United Kingdom and New Zealand.