Tara, Nur Aida Arifah (2019) The Evaluation of Gross Spread and Underpricing of Initial Public Offerings in Indonesia. PhD thesis, Victoria University.

Abstract

This study is a comprehensive analysis of Initial Public Offerings (IPO) in the Indonesian market. The aim is to provide evidence on the: 1) characteristics and main determinants of gross spread and underpricing; 2) relationship of gross spread and underpricing; and 3) post-listing day performance of IPO in the Indonesian IPO market. The relationship between gross spread, underpricing, and the determinants of gross spread and underpricing was examined under 1) pooled data analysis; and 2) panel data analysis. The data used in this research are 150 IPO firms from 2007 to 2016. The data was arranged into three panel data of industry, firm size, and offer size of IPO. Further evaluation was employed to identify the relationship of gross spread and underpricing. The two-stage least squares (2SLS) regression model is adopted to identify the relationship of two IPO costs.The last evaluation on cost of IPO was the evaluation of post-listing day performance of IPO. The distribution of gross spread components shows that the Indonesian underwriting market has different fee setting practices with greater focus on management fees. Evaluation of gross spread revealed that the gross spread level of 2% emerges as the common spread, however, gross spread showed weak clustering pattern at 2%. The pooled regression model result shows that underwriter reputation is the sole significant variable in explaining gross spread in the Indonesian IPO. The relationship of underwriter reputation and gross spread is negative and significant. This indicates that more reputable underwriters have lower gross spreads than less reputable underwriters. The result is contrary from previous works and this result can be explained by the competition hypothesis and economies of scale. The panel regression provided different results on the main determinant in gross spread. The main determinant of the industry panel analysis are firm size and firm age; and the main determinant of firm size and offer size panel analysis is offer price. The result from the distribution of underpricing shows that all IPO firms in the sample were underpriced on the first day of trading at 23.73%. Hypothesis testing of the pooled analysis shows that in general, Shanghai Stock Exchange Index (SSE), firm size and firm age were significant in explaining underpricing in the Indonesian IPO market for both pooled regression model and panel regression model. Further analysis of relationships between underpricing and the determinants of underpricing was examined under a panel regression model of industry, firm size and IPO offer size. The main determinants of the industry panel were fixed asset investment, inflation rates and SSE. The main determinants of the firm size panel were SSE, firm age, and profitability. The determinant variables of SSE and all variables included in firm-specific characteristics (firm size, firm age and profitability) were significant in explaining underpricing. Hypothesis testing on the pooled data and panel analysis provided different results on the main determinants of underpricing in Indonesian IPO market. In general, the result from both analyses indicates that the SSE and firm-specific characteristics (firm size, firm age and profitability) are more significant in explaining underpricing in Indonesia. This finding confirms that investors primarily use firms’ information and the regional stock market index influence in making decision to participate in the Indonesian stock market. The evaluation on the relationship between gross spread and underpricing, found that the two IPO costs had negative relationship or substitute related. Further, the post-listing day performance of IPO in Indonesia showed lower Cumulative Average Abnormal Returns (CARs) at the 20th-day after the listing day which indicates the return received by investors decreased.

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