Information asymmetry, corporate governance, and IPO underpricing: Evidence in Indonesia

Jeffrey Bastanta Pelawi; Rizky Yusviento Pelawi

doi:10.24914/jeb.v26i2.5375

Authors

Jeffrey Bastanta Pelawi Faculty of Economics and Business, Universitas Brawijaya
Rizky Yusviento Pelawi Faculty of Business, Universitas Multimedia Nusantara

DOI:

https://doi.org/10.24914/jeb.v26i2.5375

Keywords:

IPO Underpricing, information asymmetry, corporate governance, emerging markets, Indonesia

Abstract

This paper analyzes the relationships between information asymmetry, corporate governance, and IPO underpricing in the Indonesian IPO market. Previous studies on underpricing IPO have shown mixed results, offering several interesting research gaps to explore, especially in emerging markets. Accordingly, the purpose of the research is to examine further whether information asymmetry and corporate governance are the causes of IPO underpricing. A purposive technique is used, and 318 samples of IPOs are selected from 2010 to 2020 on the Indonesian Stock Exchange (IDX). Next, a multiple regression model is developed and tested using the EViews 9 software. Our evidence shows that underwriter reputation negatively affects IPO underpricing, indicating a high level of information asymmetry in the Indonesian IPO market. Further, our evidence reveals that board size and number of employees negatively affect IPO underpricing. Meanwhile, manager and family ownership exhibit insignificant results due to the pyramidal ownership structure. Finally, we also find that reputable underwriters charge higher underwriting fees than non-reputable ones. In general, our study demonstrates that hiring a reputable underwriter and implementing good corporate governance practices can minimize underpricing during the IPO.

Downloads

Download data is not yet available.

References

Albada, A., & Yong, O. (2017). IPO research in Malaysia: A review of under-pricing phenomenon. International Journal of Banking and Finance, 13(1), 95–118. https://doi.org/10.32890/ijbf2017.13.1.8502

Ammer, M. A., & Ahmad-Zaluki, N. A. (2016). The effect of underwriter’s market share, spread and management earnings forecasts bias and accuracy on underpricing of Malaysian IPOs. International Journal of Managerial Finance, 12(3), 351–371. https://doi.org/10.1108/IJMF-12-2014-0187

Badru, B. O. (2021). Decomposition of intended use of IPO proceeds: Evidence from Malaysia. Gadjah Mada International Journal of Business, 23(1), 76–90. https://doi.org/10.22146/gamaijb.34872

Bajo, E., & Raimondo, C. (2017). Media sentiment and IPO underpricing. Journal of Corporate Finance, 46, 139–153. https://doi.org/10.1016/j.jcorpfin.2017.06.003

Banerjee, S., Dai, L., & Shrestha, K. (2011). Cross-country IPOs: What explains differences in underpricing? Journal of Corporate Finance, 17(5), 1289–1305. https://doi.org/10.1016/j.jcorpfin.2011.06.004

Baron, D. P. (1982). A model of the demand for investment banking advising and distribution services for new issues. The Journal of Finance, 37(4), 955–976. https://doi.org/https://doi.org/10.1111/j.1540-6261.1982.tb03591.x

Beatty, R. P., & Ritter, J. R. (1986). Investment banking, reputation, and the underpricing of initial public offerings. Journal of Financial Economics, 15(1–2), 213–232. https://doi.org/10.1016/0304-405X(86)90055-3

Booth, J. R., & Deli, D. N. (1996). Factors affecting the number of outside directorships held by CEOs. Journal of Financial Economics, 40(1), 81–104. https://doi.org/10.1016/0304-405X(95)00838-6

Børing, P. (2019). The relationship between firm productivity, firm size and CSR objectives for innovations. Eurasian Business Review, 9, 269–297. https://doi.org/10.1007/s40821-019-00123-y

Carter, R., & Manaster, S. (1990). Initial public offerings and underwriter reputation. The Journal of Finance, 45(4), 1045–1067. https://doi.org/10.1111/j.1540-6261.1990.tb02426.x

Chemmanur, T. J., & Krishnan, K. (2012). Heterogeneous beliefs, IPO valuation, and the economic role of the underwriter in IPOs. Financial Management, 41(4), 769–811. https://doi.org/10.1111/j.1755-053X.2012.01201.x

Chemmanur, T. J., & Yan, A. (2019). Advertising, attention, and stock returns. The Quarterly Journal of Finance, 9(3), 1950009. https://doi.org/10.1142/S2010139219500095

Chen, C., Shi, H., & Xu, H. (2014). The IPO underwriting market share in China: Do ownership and quality matter? Journal of Banking & Finance, 46, 177–189. https://doi.org/10.1016/j.jbankfin.2014.05.028

Chen, Y., Wang, S. S., Li, W., Sun, Q., & Tong, W. H. S. (2015). Institutional environment, firm ownership, and IPO first-day returns: Evidence from China. Journal of Corporate Finance, 32, 150–168. https://doi.org/10.1016/j.jcorpfin.2015.03.002

Chua, A. (2014). Market conditions, underwriter reputation and first day return of IPOs. Journal of Financial Markets, 19, 131–153. https://doi.org/10.1016/j.finmar.2013.11.001

Colombo, M. G., Meoli, M., & Vismara, S. (2019). Signaling in science-based IPOs: The combined effect of affiliation with prestigious universities, underwriters, and venture capitalists. Journal of Business Venturing, 34(1), 141–177. https://doi.org/10.1016/j.jbusvent.2018.04.009

Cooper, D., & Schindler, P. (2014). Business research methods (12th ed.). McGraw-Hill/Irwin.

D’Souza, C., McCormack, S., Taghian, M., Chu, M.-T., Mort, G. S., & Ahmed, T. (2020). An empirical examination of sustainability for multinational firms in China: Implications for cleaner production. Journal of Cleaner Production, 242, 118446. https://doi.org/10.1016/j.jclepro.2019.118446

Dalton, D. R., Daily, C. M., Johnson, J. L., & Ellstrand, A. E. (1999). Number of directors and financial performance: A meta-analysis. The Academy of Management Journal, 42(6), 674–686. https://doi.org/10.2307/256988

Dimovski, W., Philavanh, S., & Brooks, R. (2011). Underwriter reputation and underpricing: evidence from the Australian IPO market. Review of Quantitative Finance and Accounting, 37(4), 409–426. https://doi.org/10.1007/s11156-010-0211-2

Doğan, M. (2013). Does firm size affect the firm profitability? Evidence from Turkey. Research Journal of Finance and Accounting, 4(4), 53–59.

Dong, M., Michel, J.-S., & Pandes, J. A. (2011). Underwriter quality and long-run IPO performance. Financial Management, 40(1), 219–251. https://doi.org/10.1111/j.1755-053X.2010.01140.x

Gao, S., & Hou, T. C.-T. (2019). An empirical examination of IPO underpricing between high-technology and non-high-technology firms in Taiwan. Journal of Emerging Market Finance, 18(1), 23–51. https://doi.org/10.1177/0972652719831535

Goodstein, J., Gautam, K., & Boeker, W. (1994). The effects of board size and diversity on strategic change. Strategic Management Journal, 15(3), 241–250. https://doi.org/10.1002/smj.4250150305

Gusni, Subing, H. J. T., & Lestari, W. (2019). Corporate governance mechanism, underwriter reputation and IPOs underpricing: Evidence from Indonesia capital market. International Journal of Innovation, Creativity and Change, 6(5), 45–58.

Habib, M. A., & Ljungqvist, A. (2001). Underpricing and entrepreneurial wealth losses in IPOs: Theory and evidence. Review of Financial Studies, 14(2), 433–458.

Hu, Y., Dai, T., Li, Y., Mallick, S., Ning, L., & Zhu, B. (2021). Underwriter reputation and IPO underpricing: The role of institutional investors in the Chinese growth enterprise market. International Review of Financial Analysis, 78, 101956. https://doi.org/10.1016/j.irfa.2021.101956

Huang, W., Li, J., & Zhang, Q. (2019). Information asymmetry, legal environment, and family firm governance: Evidence from IPO underpricing in China. Pacific-Basin Finance Journal, 57, 101109. https://doi.org/10.1016/j.pacfin.2019.01.005

Hughes, P. J. (1986). Signalling by direct disclosure under asymmetric information. Journal of Accounting and Economics, 8(2), 119–142. https://doi.org/10.1016/0165-4101(86)90014-5

Irhamni, F. (2021). IPO underpricing and corporate governance: Evidence from Indonesian equity market. Proceedings of the 2nd International Conference on Business and Management of Technology (ICONBMT 2020), 143–149. https://doi.org/10.2991/aebmr.k.210510.025

Johnson, J. M., & Miller, R. E. (1988). Investment banker prestige and the underpricing of initial public offerings. Financial Management, 17(2), 19–29. https://doi.org/10.2307/3665523

Katti, S., & Phani, B. V. (2016). Underpricing of initial public offerings: A literature review. Universal Journal of Accounting and Finance, 4(2), 35–52. https://doi.org/10.13189/ujaf.2016.040202

Kessler, S. R., Lucianetti, L., Pindek, S., Zhu, Z., & Spector, P. E. (2020). Job satisfaction and firm performance: Can employees’ job satisfaction change the trajectory of a firm’s performance? Journal of Applied Social Psychology, 50(10), 563–572. https://doi.org/10.1111/jasp.12695

Kotlar, J., Signori, A., De Massis, A., & Vismara, S. (2017). Financial wealth, socioemotional wealth, and IPO underpricing in family firms: A two-stage Gamble model. Academy of Management Journal, 61(3), 1073–1099. https://doi.org/10.5465/amj.2016.0256

Kourtzidis, S. A., Matousek, R., & Tzeremes, N. G. (2019). Productivity growth in network models: An application to banking during the financial crisis. Journal of the Operational Research Society, 70(1), 111–124. https://doi.org/10.1080/01605682.2017.1421851

Lepetit, L., Saghi-Zedek, N., & Tarazi, A. (2015). Excess control rights, bank capital structure adjustments, and lending. Journal of Financial Economics, 115(3), 574–591. https://doi.org/10.1016/j.jfineco.2014.10.004

Li, O. Z., Lin, Y., & Robinson, J. R. (2016). The effect of capital gains taxes on the initial pricing and underpricing of IPOs. Journal of Accounting and Economics, 61(2), 465–485. https://doi.org/10.1016/j.jacceco.2015.10.004

Li, X., Wang, S. S., & Wang, X. (2019). Trust and IPO underpricing. Journal of Corporate Finance, 56, 224–248. https://doi.org/10.1016/j.jcorpfin.2019.02.006

Loughran, T., & Ritter, J. (2004). Why has IPO underpricing changed over time? Financial Management, 33(3), 5–37.

Megginson, W. L., & Weiss, K. A. (1991). Venture capitalist certification in initial public offerings. The Journal of Finance, 46(3), 879–903. https://doi.org/10.1111/j.1540-6261.1991.tb03770.x

Nam, S.-W., & Nam, I. C. (2004). Corporate governance in Asia: Recent evidence from Indonesia, Republic of Korea, Malaysia, and Thailand. Asian Development Bank Institute.

Nielsson, U., & Wójcik, D. (2016). Proximity and IPO underpricing. Journal of Corporate Finance, 38, 92–105. https://doi.org/10.1016/j.jcorpfin.2016.03.012

Popescu, C. R. G. (2019). Corporate social responsibility, corporate governance and business performance: Limits and challenges imposed by the implementation of Directive 2013/34/EU in Romania. In Sustainability (Vol. 11, Issue 19, p. 5146). https://doi.org/10.3390/su11195146

Ranganathan, K., & Saraogi, A. (2021). What explains voluntary premarket underpricing and aftermarket mispricing in Indian IPOs? Journal of Behavioral and Experimental Finance, 32, 100565. https://doi.org/10.1016/j.jbef.2021.100565

Reber, B., & Vencappa, D. (2016). Deliberate premarket underpricing and aftermarket mispricing: New insights on IPO pricing. International Review of Financial Analysis, 44, 18–33. https://doi.org/10.1016/j.irfa.2015.11.007

Ritter, J. R., & Welch, I. (2002). A review of IPO activity, pricing, and allocations. The Journal of Finance, 57(4), 1795–1828. https://doi.org/10.1111/1540-6261.00478

Rock, K. (1986). Why new issues are underpriced. Journal of Financial Economics, 15(1), 187–212. https://doi.org/10.1016/0304-405X(86)90054-1

Rumokoy, L. J., Neupane, S., Chung, R. Y., & Vithanage, K. (2019). Underwriter network structure and political connections in the Chinese IPO market. Pacific-Basin Finance Journal, 54, 199–214. https://doi.org/10.1016/j.pacfin.2017.10.005

Sahoo, S., & Raj, R. (2022). Disclosed qualitative factors and underpricing: An empirical evidence from Indian IPO market. Pacific Accounting Review, 34(5), 687–707. https://doi.org/10.1108/PAR-06-2021-0098

Simunic, D. A. (1980). The pricing of audit services: Theory and evidence. Journal of Accounting Research, 18(1), 161–190. https://doi.org/10.2307/2490397

Singh, A. K., & Maurya, S. (2018). Corporate governance, ownership structure, and IPO underpricing: Evidence from the Indian new issue market. Indian Journal of Research in Capital Markets, 5(1), 7–24. https://doi.org/10.17010/ijrcm/2018/v5/i1/122905

Spallini, S., Milone, V., Nisio, A., & Romanazzi, P. (2021). The dimension of sustainability: A comparative analysis of broadness of information in Italian companies. Sustainability, 13(3), 1457. https://doi.org/10.3390/su13031457

Spence, M. (1973). Job market signaling. The Quarterly Journal of Economics, 87(3), 355–374. https://doi.org/10.2307/1882010

Tong, L. Y., & Ahmad, R. (2015). The signaling power of the investment banks’ reputation on the performance of IPOs on Bursa Malaysia. Jurnal Pengurusan, 45(1), 1–16.

Utamaningsih, A., Tandelilin, E., Husnan, S., & Sartono, R. (2013). Asymmetric information in the IPO underwriting process on the Indonesia stock exchange: Pricing, initial allocation, underpricing, and price stabilization. Journal of Indonesian Economy and Business, 28(3), 311–321. https://doi.org/10.22146/jieb.6220

Villanueva-Villar, M., Rivo-López, E., & Lago-Peñas, S. (2016). On the relationship between corporate governance and value creation in an economic crisis: Empirical evidence for the Spanish case. BRQ Business Research Quarterly, 19(4), 233–245. https://doi.org/10.1016/j.brq.2016.06.002

Wang, S., Wang, X., Wang, Y., & Zhang, X. (2021). How does the creditor conflict affect bond IPO underpricing? The Journal of Finance and Data Science, 7, 67–93. https://doi.org/10.1016/j.jfds.2021.03.002

Wang, W., & Yung, C. (2011). IPO information aggregation and underwriter quality. Review of Finance, 15(2), 301–325. https://doi.org/10.1093/rof/rfp021

Wang, X., Cao, J., Liu, Q., Tang, J., & Tian, G. G. (2015). Disproportionate ownership structure and IPO long-run performance of non-SOEs in China. China Economic Review, 32, 27–42. https://doi.org/10.1016/j.chieco.2014.11.004

Yan, Y., Xiong, X., Meng, J. G., & Zou, G. (2019). Uncertainty and IPO initial returns: Evidence from the tone analysis of China’s IPO prospectuses. Pacific-Basin Finance Journal, 57, 101075. https://doi.org/10.1016/j.pacfin.2018.10.004

Yatim, P. (2011). Under-pricing and board structures: An investigation of Malaysian initial public offerings (IPOs). Asian Academy of Management Journal of Accounting and Finance, 7(1), 73–93.

Yuliani, Y., Wahyuni, D., & Bakar, S. W. (2019). The influence of financial and non-financial information to underpricing of stock prices in companies that conduct initial public offering. Ekspektra: Jurnal Bisnis Dan Manajemen, 3(1), 39–51. https://doi.org/10.25139/ekt.v3i1.1442