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 importantinformation about the company. But the motivation of the issuers (originalshareholders) for going public is unknown and hidden from the investingpublic, making the IPO investment a risky venture. Based on the SignallingTheory, 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 oflisting. Our samples are collected from the Bursa Malaysia from 2002 to2008 and the performances are tracked till 2011. The regression results areconsistent with the Signalling Theory which stipulates that when issuerssell down their stakes, it sends a gloomy signal, even though the offer ofOFS does not cause any dilution to company’s value. In addition, smallcompanies with high OFS ratio record weaker long-run performance thanlarge companies.