Valuation Errors and the Initial Price Efficiency of the Malaysian IPO Market

This paper examines the valuation and initial price performance of Malaysian Initial Public Offerings (IPOs). A number of theoretical models have been put forward to explain why new equity issues are issued at a discount. Foremost among them are explanations involving the adverse selection problem arising from information asymmetry, moral hazard issues relating to the underwriters, and signaling incentives. In this study, three alternative reasons are considered. The first one examines the errors arising from the valuation methods used to price the IPOs. The second one looks at the market conditions at the time of the offer, and the last one tests the efficiency of the Malaysian stock market. The sample consists of 264 companies that were listed on the Malaysian Stock Exchange from 1999 to 2004. The results indicate that IPO market prices are efficient in early trading and that underpricing is not influenced by market conditions. However, the results do suggest that underpricing is the result of industry risk and errors arising from the valuation methods used.