Predictive Role of Ex Ante Strategic Firm Characteristics for Sustainable Initial Public Offering (IPO) Survival

Abstract

This study attempts to predict how long a newly listed corporation, usually termed initial public offering (IPO), will survive on the equity listing market. The three-fold contribution of this study comprises a hand-collected and substantially expanded dataset for listed IPOs (1990–2017) over a maximum tracking period of 31 years (1990–2020) to predict the IPO survival on emerging Malaysian capital market, the rationale and consequences for unifying the two listing boards (Main Board and Second Board) in 2009, and an investigation of the predictive role of ex ante strategic prospectus information as early warning signals for sustainable survival of Malaysian IPOs. We also make comparisons for the survival profile of IPOs listed on different listing equity boards. We use Cox proportional hazard (PH) model to estimate the empirical results because of the cohort research design of the study. Overall empirical results show that survival curves for IPOs listed on Main Board and Second Board were not statistically different. However, Second Board IPOs remained more vulnerable to hazard. The survival curves for IPOs listed on Main Market and ACE Market are statistically different. Empirical results reveal that high share premium, high listed capital, and longer firm age at listing date significantly increase the survival (reduce hazard) of IPOs listed on the Main Market and the Second Board. However, bigger firm size and elevated risk factors significantly reduce the survival (increase hazard) of the listed IPOs mentioned above. However, share premium is the only variable that has a negative and significant correlation with IPO survival on ACE Market. These results have implications for the regulators, prospective investors, and policymakers of emerging markets, where the IPO prospectus disclosures bridge the information asymmetry gap prevailing due to the nonexistence of public information prior to the IPO. Empirical findings of this study can be generalized to other developing and emerging markets where IPO prospectus substantially mitigates information asymmetry and ex ante strategic firm characteristics act as early warning signals in predicting IPO survival.

Survivability of IPO Companies in the Malaysian Market. Evidence from the Kaplan-Meier Survival Analysis

“…In the third-year post-IPO, the survival rate of IPO companies plunges by another 12.33% (83.87% to 71.54%). This study reports lower survival rates than found in past studies, both developed and developing markets (Schultz, 1993;Kooli & Meknassi, 2007;Chou et al, 2013;Ahmad & Jelic, 2014;Shari, 2019;Ahmad et al, 2021). Consistently, the survival rate falls lower in the fifth year post-IPO, at 62.81% and seventh year post-IPO, at 56.91%.…”

“…This finding is substantially lower than the average survival rate of IPO companies in the Asia-Pacific reported in a study by Espenlaub et al (2016), at 96.84% three years after listing and 93.17% five years after listing. This study also emphasizes that the IPO companies' survival rate is significantly lower than the survival rate of IPO companies reported in the two studies conducted (Shari, 2019 andAhmad et al, 2021) in the Malaysian market throughout the seven years observation. The finding reports a median of 114 months for the remaining 50% of IPO companies to survive post-IPO.…”

“…Shari (2019) also compared the survival of IPO companies between markets and found that the companies listed in the Main Market have better survivability than the ones listed in the ACE Market. In contrast, a more recent study in the Malaysian market by Ahmad et al (2021) reports that the survival of IPO companies listed in the ACE Market has a higher rate by 10.4 percent compared to the Main Market throughout three years post-IPO. Ahmad et al (2021) discover a statistical difference in IPO companies' survival between the Main Market and the ACE Market.…”

“…In contrast, a more recent study in the Malaysian market by Ahmad et al (2021) reports that the survival of IPO companies listed in the ACE Market has a higher rate by 10.4 percent compared to the Main Market throughout three years post-IPO. Ahmad et al (2021) discover a statistical difference in IPO companies' survival between the Main Market and the ACE Market. Other studies in the developed markets have also found IPO companies' survivability to be statistically different according to companies' listing years and sectors (Espenlaub et al, 2012;Ahmad & Jelic, 2014;Bhattacharya et al, 2015;Espenlaub et al, 2016).…”

“…The study reveals that the difference in Malaysian survival rate compared to other markets is due to the uniqueness of the Malaysian market having the frameworks of PN17 and GN3. Another study in the Malaysian market using a more recent sample (2002 to 2017) but a shorter observation period (three years) is by Ahmad et al (2021), reporting that the survival rate of IPO companies is at 83 percent. Table 1 summarizes the survival rate of IPO companies reported in past studies.…”