Initial public offerings and investor heterogeneity: evidence from Malaysia

We examine IPO underpricing, offer size, over-subscription ratio, and listing board, in relation to investors' heterogeneous beliefs. Since investors' beliefs are not directly observable, our proxies for investor heterogeneity are specifically tied to variables that reflect investors' behaviour in the IPO immediate aftermarket, namely first-day turnover and first-day price spread. For the entire sample and for the hot issues, we find that IPOs that are highly underpriced, small in offering size and are listed on the MESDAQ Market tend to have high level of heterogeneous beliefs among investors. Investor disagreement is likely to create significant trading volume and result in large price spread. For cold IPOs, the results show that IPOs listed on the MESDAQ market induce high divergence of opinions among investors. It is also shown that initial return of cold IPOs is irrelevant in explaining IPO share turnover and price spread on the first trading day.