Bumiputera Equity Requirements and Initial Public Offering Underpricing

The purpose of this paper is to investigate how the share allocation to the Bumiputera policy and a change in the Bumiputera equity policy in 2009 impacted the underpricing of Initial Public Offering (IPO) in Malaysia. A unique aspect of the Malaysian IPO market is the share fraction designated for Bumiputera investors. It is hypothesized that the Bumiputera equity policy introduced in 1976 could potentially explain IPO underpricing. The study utilized signaling theory to formulate its hypotheses. Data on 462 IPOs over a 19-year period were collected from the websites of Bursa Malaysia. Multivariate regression analyses were employed to evaluate the association between IPO underpricing and the independent variables in this study. The study revealed a significant positive relationship between Bumiputera equity ownership and underpricing, suggesting that heightened competition among Bumiputera investors provides an advantage, leading to increased underpricing during listing. Conversely, the change in the Bumiputera equity policy in 2009 had an insignificant positive effect on IPO underpricing, likely due to competitive offer prices set by issuers and underwriters, resulting in a negligible impact on IPO underpricing. The results of this study may be useful to practitioners in the Malaysian IPO market, including investors, issuers, policymakers, regulators, and underwriters. The study supports signaling theory and underscores that firms seeking listing on the main market must allocate shares to Bumiputera investors under this mandatory regulation.