Macroeconomic Factors and IPOs in Malaysia

Abstract

This paper focuses on the relationship between the macroeconomic factors and initial public offerings (IPOs) in Malaysia over the period 1990 to 2008. This study applies the Markov regime switching regression model to test whether the changes in the interest rate and industrial production index are causes of ‘cold’ and ‘hot’ IPO regimes in Malaysia. The empirical results show that the impact of these variables on IPO numbers is not time-invariant, but is related to fluctuations in the IPO, and that the impact of these variables on IPO numbers is far greater during the cold regime than in the IPO hot regime. These empirical findings suggest that a hot IPO market regime evolves when investors begin experiencing extremely high initial returns and their expectations about future interest rates provide an indication of the 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 rates in the future, and that the valuation of shares would be affected due to lower dividend yield. Hence, such conditions keep investors away from the IPO markets causing a cold IPO market.