Earnings forecast disclosures and oversubscription rates of fixed-price initial public offerings (IPOs): the case of Malaysia

Abstract

PurposeThe main purpose of this study is to examine the disclosure of earnings forecasts in firms' prospectuses to explain investor demands or, in other words, oversubscription rates of Malaysian initial public offerings (IPOs).Design/methodology/approachOrdinary least squares and robust methods were used to examine cross-sectional data comprising 466 fixed-price IPOs reported for the period from January 2000 to February 2020 on Bursa Malaysia.FindingsThe results showed that IPOs with earnings forecasts obtained higher oversubscription rates than those without earnings forecasts. IPOs with earnings forecasts provide value-relevant signals to prospective investors about the good prospects of firms, resulting in an increase in the demand for IPO shares. For the IPO samples listed during the global financial crisis (GFC) period, IPOs with earnings forecasts had negative impacts on the oversubscription rates. These results were robust to quantile methods and the two-stage least squares method.Research limitations/implicationsThe research findings provide fresh information for investors regarding the importance of earnings forecasts as a trustworthy signal of a firm’s quality when making share subscription decisions.Practical implicationsThe regulator is advised to encourage issuers to include earnings forecasts in their prospectuses since such forecasts help to increase the demand for IPOs.Originality/valueThis study contributes to the literature by offering empirical evidence regarding the signalling impact of earnings forecast disclosures on investor demands for Malaysian IPOs. Moreover, this study provides evidence demonstrating the impact of earnings forecast disclosures on oversubscription rates of Malaysian IPOs during the GFC period.