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.