Unveiling the Role of Market Sentiment in Explaining Malaysian IPO Aftermarket Share Performance

Research Question: This study constructs a composite market sentiment index and incorporates behavioral, issue, firm, and market characteristics to examine Malaysian Initial Public Offering (IPO) aftermarket share performance. Motivation: Over the past two decades, Malaysia’s capital market has undergone significant structural changes, increasing market participant heterogeneity and influencing investment strategies and risk appetites. These shifts may have impacted investor behavior, particularly in terms of risk tolerance and decision-making. Idea: This study investigates the influence of market sentiment on Malaysian IPO aftermarket performance and assesses whether IPOs tend to underperform or overperform in the long run. Data: The analysis covers 571 IPOs listed on Bursa Malaysia between January 2000 and December 2020. Methodology: A multiple regression model is employed to examine the determinants of aftermarket share performance using Buy-and-Hold Adjusted Return (BHAR) as the dependent variable. Market sentiment is captured through three approaches: (1) Baker and Wurgler’s (2007) Principal Component Analysis, (2) Jiang et al.’s (2022) Scaled Principal Component Analysis, and (3) Huang et al.’s (2015) Partial Least Squares method. This study extends Kong and Tang’s (2024) work on IPO underpricing by focusing on long-run performance. Findings: Malaysian IPOs generally underperform between one and 48 months post-listing. Market sentiment plays a significant role in predicting aftermarket share performance, supporting Miller and Reilly’s (1987) divergence of opinion hypothesis as a plausible explanation for IPO underperformance. Contributions: By integrating behavioral finance concepts, this study recognizes that investor decisions are influenced not only by fundamental factors but also by market sentiment and psychological biases. This novel perspective enhances the understanding of IPO aftermarket share performance in Malaysia.