IPO UNDERPRICING AND AFTERMARKET LIQUIDITY: EVIDENCE FROM MALAYSIA

This study empirically examines the influence of underpricing on the aftermarket liquidity of 191 initial public offerings (IPOs) that are listed on Bursa Malaysia, an emerging stock market in the South-East Asia, from June 2003 to December 2008. This hypothesized effect is based on the liquidity theory which posits that underpricing contributes to the higher level of aftermarket liquidity. Despite the focus on only underpriced IPOs, the preliminary results are still consistent with those of the recent studies in reporting dramatically low initial returns particularly in 2008, the year that witnesses the sub-prime financial crisis in the United States. The multiple regression results indicate that there exists a significantly positive relationship between Malaysian IPO under-pricing and the level of IPO liquidity in the secondary market. This finding implies that the issuers' decision to underprice pays off. Even though they receive less new capital than they would otherwise have, their highly liquid shares have greater chances of survival in the secondary market and so do the future seasoned equity offerings.