Impact of Potential of Follow-on Offerings on IPOs Initial Returns

Abstract

This paper examined 410 IPOs listed on Bursa Malaysia throughout 2003–2019 to investigate the signalling impact of potential follow-on offerings (PFOs) on initial returns. We found a negative yet insignificant association between PFO and initial return. Assuming that the diverse signalling mechanisms based on the different levels of investor demand (DD) may have contributed to the insignificant negative result, we found that the interaction between PFO and DD provides a possible path in connecting to IPO initial return. Significant negative results of the interaction term indicate that while the influence of PFO on initial return depends on the level of DD, IPO return would be significantly lower for firms with a higher PFO. Consequently, a higher PFO suggests greater potential for the issuance of external equity financing, sends a negative signal to investors, and leads to a downward adjustment on overvalued price and initial return. Our findings add to the signalling theory in the context of an emerging country, namely, Malaysia.