The real effects of primary and secondary equity markets on firm performance

Abstract

Purpose The purpose of this paper is to investigate the real effects of primary and secondary equity markets on the post-issue operating performance of initial public offering (IPO) firms. Design/methodology/approach The author utilizes the intended use of proceeds as a proxy variable for the primary market and the investment-to-price sensitivity and the informativeness of stock prices as alternative proxy variables for the secondary market. The compositional data, and non-parametric quantile regressions which are more robust to outliers than standard least square regressions, are employed for Indonesian equity market over the period of 1999-2013. Findings While confirming that firm operating performance can be explained by the firm’s motivation to go public, the author also shows that the operating performance is positively affected by investment-to-price sensitivity and negatively affected by stock price informativeness. The stock prices affect investment decisions by the way that the more liquid a stock is, the more informative its price is, and the more relevant stock prices are in investment decisions. These findings still hold after controlling for ownership structure. Originality/value Departing from the existing literature, the author investigates the role of primary and secondary equity markets for firm performance in an integrated framework because both markets interact closely in reality. The author shows that public listed firms can benefit both from the capital-raising function of the primary market and from the informational role of the stock prices of the secondary market. A measure of stock price informativeness, 1−R2, however, must be understood in the context of thin trading in the sense that the level of liquidity affects the level of stock price informativeness.

Overreaction and underreaction anomalies in the Indonesian stock market: a sectoral analysis

“…In contrast, using the De Bondt and Thaler’s (1985) approach, Pasaribu (2011) found no symptom of overreaction anomaly at three-month, six-month and annual periods of the LQ-45 stocks in Indonesia during the 2003-2007 period. Similar to Sumiyana (2009); Faisal and Majid (2016) and Andriansyah (2017) document market anomaly in the big-open Indonesian emerging market. The former study found the existence of the calendar effects of the turn-of-month and the weekend effects during the period 2001-2014, while the latter study found that the operating performance of the firms was positively and negatively influenced by investment-to-price sensitivity and information pricing errors, respectively.…”

“…The study found that noise and overreaction phenomena were commonly occurring in the opening and closing prices, and the investors simultaneously corrected the noise and overreaction during the first 30-min interval on every trading day. Andriansyah (2017) investigates the real effects of primary and secondary equity markets on the post-issue operating performance of initial public offering firms in the Indonesian stock market over the period 1999-2013. The study found that the firm operating performance was related to the firm’s motivation to go public.…”

“…In the context of the Indonesian stock market, the studies on overreaction anomaly have been examined by Sumiyana (2009); Pasaribu (2011); Faisal and Majid (2016) and Andriansyah (2017). Sumiyana (2009) examines the overreaction of the Indonesian LQ-45 stocks by using the intraday data of every 30-min interval from January 2006 to December 2006 and found that the overreaction phenomena was commonly occurring in the opening and closing prices.…”

“…The existing studies on overreaction anomaly in Indonesia suffer from major shortcomings; thus, they fail to presence reliable and comprehensive empirical evidences. A majority of studies found the presence of overreaction anomaly (Sumiyana, 2009; Faisal and Majid, 2016; Andriansyah, 2017), while few studies found the absence of overreaction anomaly (Pasaribu, 2011) in the Indonesian stock markets. These contradicting empirical evidences might lead to the confusion among the inventors to implement proper investment strategies to gain maximum profits in inventing their monies in the Indonesian stock market.…”

“…These contradicting empirical evidences might lead to the confusion among the inventors to implement proper investment strategies to gain maximum profits in inventing their monies in the Indonesian stock market. These inconclusive findings were simply because the studies on the overreaction anomaly only investigated a specific market such as LQ-45 (Sumiyana, 2009; Pasaribu, 2011) or the entire Indonesian market at an aggregate level (Faisal and Majid, 2016; Andriansyah, 2017).…”