Determinants of Mispricing on Indonesian Sovereign Sukuk Auction

Abstract

Common Value Theory points out the situation in financial instrument auction where investors tend to bid a lower price than the actual value and it results in an underpricing of financial instrument. The underpricing, further, may hamper the market as it leads to revenue loss for the company. As the Islamic financial market developed, government of Indonesia expands their instrument variations and started to issue Islamic Bond (sukuk) in 2008. There is still lack of empirical literature relating to sukuk pricing performance although sukuk has several distinct features such as the existence of underlying asset. This paper attempts to examine the underpricing indication in sukuk issuance during 2012-2016 and analyze the factors that might explain its persistence. To examine the existence of sukuk underpricing issuance, this study uses yield spread from weighted average yield when auction and market yield when auction. To this end, Ordinary Least Square model is applied to analyze the determinants of underpricing. In contrast to the theory, the result shows that average sukuk issuance in Indonesia indicates a higher market yield than weighted average yield when auction.