The Influence of Growth Opportunities on IPO Initial Aftermarket Performance

Abstract

This study examined the influence of growth opportunities of firms on the immediate aftermarket performance of IPOs. The growth opportunities were defined as the amount of proceeds received during IPOs to activities that support the growth of a firm, such as assets acquisition, and research and development (R&D). Acknowledging that not much information about a firm is possibly received by investors prior to its listing in a stock exchange, investors will rely mostly on the information supplied in the “Prospectus” as a reliable channel of their participation evaluation in the IPO firm. One crucial piece of information is on the allocation amount of IPO proceeds as it should signal the directions of a firm in the aftermarket. This study proposes that an IPO firm would have a larger potential to grow if it allocates a bigger amount of proceeds to growth activities, which will encourage higher demand on and subscription of shares of the IPO firm. Eventually, the higher demand would lead to a higher share price of the firm and a higher return for investors in the aftermarket. Leveraging this proposition, a total sample of 436 IPOs listed on Bursa Malaysia from 2000 to 2017 were tested using the multiple regression analysis. This study reveals that the amount of proceeds allocated to growth activities are positively and significantly related to the return of IPOs in the initial aftermarket.