Macroeconomic Factors and Initial Public Offerings (IPOs) in Malaysia

Abstract

This paper seeks to address the question of whether local macroeconomic variables have any influence on the numbers of IPOs in an emerging market, Malaysia over the period of 1990 to 2008. The evidence of a significant negative relationship between interest rate and the numbers of IPOs, and a significant positive relationship between industrial production and the numbers of IPOs are found. A long-run equilibrium relationship between interest rate, industrial production and numbers of IPOs using cointegration and Vector Error Correction models is found. The impact of interest rate on the numbers of IPO numbers is far greater in the cold IPO regime than during IPO hot regime using Markov regime switching regression model are also found. The empirical finding seems to detect direction of the IPO market reasonably. The results show that hot IPO market regime evolves when the investors begin experiencing extremely high initial returns and their expectation about the future interest rate provide an indication about entrepreneur's/manager's willingness to move to the IPO market. On the other hand, when a government pursues monetary tightening, investors believe that future earnings are expected to shrink due to higher interest rate in future, and valuation of shares would be affected due to lower dividend yield, it keeps investors away from the IPO markets causing cold IPO market.