Pre-IPO Accrual Quality and Under-Pricing in the Indonesian Market

A recent study by Yanthi Hutagaol-Martowidjojo, one of our faculty members, and Mookung Kim, one of faculty members from the International Business Program of Binus University, investigates the relationship between pre-IPO firms’ earnings quality that is proxied by accrual quality (AQ) prior to the IPO, and their underpricing degree in their early days of trading. Our main argument is that pre-IPO AQ is one source of information risk that affect the degree of information asymmetry among the issuing firms and potential investors. By the measurement, the higher AQ reflects lower quality of accrual. Using the regression models on a sample of 144 Indonesian IPO firms that went public during 2007-2017, this study finds that there is a positive relationship between the AQ and the underpricing degree. It implies that the higher the AQ (lower quality of accrual) of a firm, the higher the underpricing degree will be. In other words, the better the AQ of a firm, the lower the firm’s information asymmetry will be in the market, resulting in a lower underpricing degree in the early trading days. Furthermore, the study extends and includes some control variables, namely market condition, public ownership, and underwriter reputation. The managerial implication of this study is that as firms prepare to go public it is important for the managers of firms to maintain a good accrual quality in order to decrease the market information asymmetry of their offerings.

Full paper can be accessed here