Winner’s Curse and Bandwagon Effect in Malaysian IPOs: Evidence from 2001-2009

Abstract

This paper examines the winner's curse hypothesis and the bandwagon effect in initial public offerings (IPOs), using Malaysian IPO data from January 2001 to December 2009. The average initial return (offer-to-close) for the 160 Malaysian private placement IPOs is 18.51 percent as opposed to the average initial return (offer-to-close) of 28.84 percent for the 210 non-private placement IPOs, which gives support to the winner's curse hypothesis, where uninformed investors (using non-private placement IPOs as the proxy) demand a higher initial return in the absence of informed investors (using private placement IPOs as the proxy). The study also finds that the presence of a large number of informed investors in an IPO exercise, as compared to uninformed investors, brings with it an increased interest, or the bandwagon effect, in that particular stock, which results in higher initial return. ABSTRAK Kajian ini meneliti hipotesis sumpahan pemenang dan kesan ikut serta pada tawaran awam permulaan (TAP), dengan menggunakan data TAP Malaysia dari Januari 2001 hingga Disember 2009. Purata pulangan awal (tawaran-hinggapenutup) bagi 160 TAP Malaysia jenis perletakan persendirian adalah 18.51 peratus, berbanding purata pulangan awal (tawaran-hingga-penutup) sebanyak 28.84 peratus bagi 210 TAP Malaysia jenis bukan perletakan persendirian, yang menyokong hipotesis sumpahan pemenang, iaitu pelabur kurang berpengetahuan (dengan TAP Malaysia jenis bukan perletakan persendirian sebagai proksinya) mahukan pulangan awal yang lebih tinggi bilamana tiadanya pelabur berpengetahuan (dengan TAP Malaysia jenis perletakan persendirian sebagai proksinya) dalam sesuatu TAP. Kajian ini juga mendapati bahawa kehadiran jumlah pelabur berpengetahuan yang besar dalam satu-satu TAP, berbanding dengan jumlah kehadiran pelabur kurang berpengetahuan, menyebabkan peningkatan minat pada saham yang berkenaan, atau berlakunya kesan ikut serta, yang menghasilkan pulangan awal yang lebih tinggi.

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“…This may hint that the presence of those informed investors is widely known to the public prior to the first day of IPO trading, leading to a subsequent increase in their initial returns. Thus, the results differ from previous studies such as Yong (2011) and Yong (2013) and against the winner's curse hypothesis. In addition, the information about the private placement IPOs also allowed us to test for the bandwagon effect.…”

“…Since 2000, a number of papers have attempted to explain this usual occurrence by attributing it to asymmetric information (see (Baron & Holmström, 1980;Beatty. & Ritter, 1986;Rock, 1986)) behavioural theory (see (Ljungqvist, 2005;Loughran & Ritter, 2002)) winner's curse (see (Yong, 2011(Yong, , 2013) bandwagon effect (see (Yong, 2011(Yong, , 2013) and size effect (see Yong (2013)).…”

“…To determine the driving force behind the substantial IPO underpricing observed in Malaysia, researchers have initially centred their scrutiny on variables such as underwriters' reputation (see Jelic et al (2001)) management earnings forecast (see Jelic et al (2001)) firm size (see (Jelic et al, 2001;Wan-Hussin, 2005;Yatim, 2008)) owners' participation (see Wan-Hussin (2005)) share lockup (see Wan-Hussin (2005)) oversubscription ratio (see Wan-Hussin (2005)) and board independence (see Yatim (2008)). But in recent years the emphasis has shifted to the types of IPOs (see (Yong, 2011(Yong, , 2013) the listing board (see Yong (2013)) the number of shares issued (see Yong (2016)) and the offer price (see Yong (2016)). In an effort to dissect why Malaysian IPOs tend to be underpriced, this paper revolves around four factors that are commonly linked to this widespread phenomenon: types of IPOs, firm size, IPO lockup and underwriters' reputation.…”

“…Over the years IPO underpricing has been theoretically attributed to asymmetric information (Beatty. & Ritter, 1986;Hou & Gao, 2017;Ljungqvist, 2005;Rock, 1986) behavioural theory (Ljungqvist, 2005;Loughran & Ritter, 2002) winner's curse (Yong, 2011(Yong, , 2013 bandwagon effect (Yong, 2011(Yong, , 2013) size effect (Yong, 2013) investor sentiment (Hou & Gao, 2017) corporate governance (Hou & Gao, 2017;Ng, 2014) underwriters' reputation (Beck, 2017;Jelic et al, 2001;Vong & Trigueiros, 2017) and underwriters' monopsony power (Chang, Chiang, Qian, & Ritter, 2017). Yatim (2008) noticed that the extent of IPO underpricing in Asia is greater than in more developed economies (Loughran.…”

“…Her study also suggested that future research should include factors such as types of offers, types of ownership, growth opportunities, existence of venture capital and share allocations. By analysing 370 fixed-price IPOs from January 2001 to December 2009, Yong (2011) identified a potential impact of the winner's curse effect and the bandwagon effect on IPO underpricing in Malaysia.…”