The Initial Performance of Kuala Lumpur Stock Exchange Mesdaq Board Initial Public offerings (ipos) Listed over the 1999-2003 Period

THE INITIAL PERFORMANCE OF KUALA LUMPUR STOCK EXCHANGE MESDAQ BOARD INITIAL PUBLIC OFFERINGS (IPOS) LISTED OVER THE 1999-2003 PERIOD

This paper examines the initial performance of Kuala Lumpur Stock Exchange MESDAQ Board Initial Public Offerings (IPOs) listed over the 1999-2003 period. The sample of 32 IPOS was studied to determine the level of return received in the first day trading and results show that in average the initial return received is 50.87 percent and the average market-adjusted initial return is 48.61. Therefore, we can conclude that underpricing exists in the new issues of shares in KLSE especially in the MESDAQ Board. This result is highly significant and consistent with empirical evidence presented on international markets. This phenomenon may exist in Malaysia because the implementation of a disclosure based system as of January 1996 by Securities Commission (SC) where the offer price setting mechanism was no longer fixed by the SC but market-based.

Apart from that, we can see that IPOs listed in technology sectors outperform the other sectors in terms of initial returns. This finding confirm with the main purpose for the establishment of MESDAQ Board that is to provide an avenue for high growth and technology-based company. Besides that, the longer operating history of the company, the lower the initial return received while the younger companies that are between zeros to five years operating history had the highest underpricing level of 55.05 percent and MAIR of 51.37 percent. This may due to the factors that older companies are regarded as less risky, therefore they tend to have lower underpricing level.

A further analysis reveals that the merger between MESDAQ and KLSE in March 2002 gives a significance impacts to the performance of the IPOs, where a difference of 54.88 percent in average market-adjusted initial returns was found from the time periods before and after the merger. Initial return also increases consequently from 2.3 percent to 57.19 percent. Besides that, the IPOs numbers also boost up from 5 companies before merger to nearly 27 companies after the merger that is nearly 440 percent increase. It is because the merger provides the better liquidity for the market thus make it an attractive opportunity for more issuer to raise funds and for investors to gain profit.

Generally, nearly 84 percent or 27 IPOs offer a positive average return at the first day trading whilst only 16 percent or 5 IPOs offer an initial discount. However, the insignificant price movement within one year after the first trading day indicates that the participants in the market place were not overacting to the price of the new issues. Therefore, we can conclude that those investors who are not fortunate enough to purchase these new issues at the offer price can still enjoy some high positive returns if they were to buy the shares at the opening price or days