Date of Award

1-1-2000

Document Type

Thesis

Publisher

Edith Cowan University

Degree Name

Doctor of Philosophy

Faculty

Faculty of Business and Public Management

First Supervisor

Professor David E. Allen

Second Supervisor

Professor Gary S. Monroe

Abstract

The purpose of this study is to examine the relation between accounting measures of total firm risk and the magnitudes of IPO initial returns. The existing explanations of the underpricing of lPO's suggests that the extent of underpricing is positively related to ex ante uncertainty about the issues. This study argues that accounting risk measures are related to the ex ante uncertainty. Since ex ante uncertainty is positively related to IPO underpricing, accounting risk measures are also arguably related to IPO underpricing. An event methodology is employed in this study. Five accounting risk measures are examined: financial leverage, operating leverage, firm size, firm growth, and profitability. The model is tested using a sample of 149 Indonesian IPOs that went public during the period of 1989-1997. Three accounting measures of total risk: financial leverage, size, and firm growth, are found to be consistently related to the degree of underpricing. Financial leverage, measured as the ratio of total debt to total assets plus the market value of the issue in the first day, is positively and significantly associated with the degree of underpricing. A negative and significant association is found between firm size, measured as the size of the issue, and the degree of underpricing. In contrast to my expectations, growth is negatively related to the degree of underpricing. The coefficients of the other two accounting risk measures: operating leverage and profitability, are mixed. Overall, the results allow rejection of the null hypothesis that accounting measures of total firm risk are not related to the degree of underpricing. Consistent with previous studies, this study finds that the portion of shares retained by the initial owners and the state of the market arc significantly related to the extent of underpricing. Other findings reveal that underpricing is positively related to aftermarket standard deviation of return and is negatively related to the IPO’s number of years in operation and the quality of underwriter. Further investigation suggests that the model fits better in the situation where more firms are making IPOs (hot periods). Tests on the pricing of IPOs provide additional evidence that the IPOs’ accounting information is value relevant to the market price of the IPO. In particular, the IPOs' accounting information explains a large part of the variation of the offering price and first week market price. Two important implications pertaining to the findings of this study are identified. Firstly, the study has provided further evidence that the degree of underpricing is positively related to the ex ante uncertainty about the aftermarket price of the issue. Secondly, the results give additional support to the proposition that accounting information is value relevant to the pricing of IPOs

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