Intended Use of Proceeds and the Performance of Initial Public Offerings (IPO)

Abstract

Other than debt financing, Initial Public Offerings (IPO) become a common method of capital raising among firms for various purposes. Prospectus is issued on the pre-issuance of the IPO disclosing various mandatory and non-mandatory voluntary information to help the potential investors in their decision making process. Other than financial information on previous and forecasted future performance, the intended use of the IPO's proceeds information is one of the crucial information for the stakeholders especially the investors as they will be the financial contributor for the purposes. In one hand, the issuers may decide to issue highly priced IPO to fulfil their financial needs and other going-public motives. In the other hand, the investors willing to subscribe for the IPO to meet their investment target. The gap between the objectives of these two main stakeholders create uncertainties that may jeopardize the interest of the investors. Thus, the objective of this paper is to investigate the relationship between the intended uses of the IPO's proceed disclosed in the prospectus and their subsequent performance of the stocks. The result of the study can provide input for the investors and other stakeholders for their decision making process to meet their respective objectives.

Decomposition of intended use of IPO proceeds: Evidence from Malaysia

“…In the Malaysian equity market, Adanan, Bustamam, and Saidin (2017) used a sample of 62 IPO companies between the period from 2012 to 2015, and reported that IPO companies' intended use was for investment, debt repayment and working capital purposes; however, there was no empirical justification for the results reported. Other studies in Malaysia, like those by Abdul-Rahim and Che-Embi (2013) and Jelic et al (2001), using a sample of 384 IPOs from 1999 to 2008, and 182 IPOs from 1980 to 1995, have found that most IPO issuers used the proceeds for growth opportunities.…”