The Signalling Value of Public Issue and Offer for Sale Ratios on the Performance of Initial Public Offers

Abstract

Investors of initial public offers (IPOs) rely on the prospectus for important
information about the company. But the motivation of the issuers (original
shareholders) for going public is unknown and hidden from the investing
public, making the IPO investment a risky venture. Based on the Signalling
Theory, we postulate that the public issues (PI) and offer for sale (OFS)
ratios to contain properties to signal the intention of the issuers at time of
listing. Our samples are collected from the Bursa Malaysia from 2002 to
2008 and the performances are tracked till 2011. The regression results are
consistent with the Signalling Theory which stipulates that when issuers
sell down their stakes, it sends a gloomy signal, even though the offer of
OFS does not cause any dilution to company’s value. In addition, small
companies with high OFS ratio record weaker long-run performance than
large companies.