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1. Introduction
Initial public offerings (IPOs) serve as an alternative way of raising funds. For an issuer, IPOs would be the preferred funding mechanism that provides several benefits for a company, such as improving the public image of the company. However, there is a risk of the IPOs not being subscribed by the market. If the market is healthy, an IPO would normally be oversubscribed by investors. Oversubscription, which could be interpreted as investors’ demand, is an essential element in the success of an IPO. In Malaysia, Dawson (1987), Low and Yong (2011), Taufil-Mohd (2007) and Yong and Isa (2003) found that the oversubscription rate was 44, 33.59, 41.14 and 43.71 times, respectively.
Based on the existing literature, there are different levels of oversubscription observed in different countries that denote there may be certain unique features in each country which affect the performance of IPOs (Loughran et al., 1994; Taufil-Mohd, 2007). Pricing mechanism on initiative to enhance the efficiency and transparency of the Malaysian market is one of the distinct features in Malaysian IPOs. Generally, Malaysian IPOs are issued through a fixed-price mechanism, unlike in developed countries, such as the USA where the IPOs are normally issued through book-building and auction mechanisms. Under the fixed-price mechanism, the offer price of the IPOs is fixed by the issuer and underwriter without knowing the demand from investors. In contrast, under the book-building and auction mechanisms, firms are allowed to extract information on shares demand from investors before setting the final price and issue size. As a result, the level of oversubscription and underpricing is lower for book-building and auction market as compared to fixed-price mechanism (Agarwal et al., 2008; Low and Yong, 2011). Since the Malaysian IPO market mainly uses fixed-price mechanism, it may have a different effect on oversubscription rates as compared to other markets that use book-building and auction approaches. This scenario calls for this study to examine the factors that trigger oversubscription in its attempts to fill the gap in current literature pertaining to the subject of this study.
Another distinct feature of the Malaysian market is the Shariah-compliant status. The Shariah-compliant status indicates that a company’s activities are free of non-permissible conduct, such as interest-based transactions, unethical elements and...