Eka Yuniarti & Dina Fitrisia Septiarini

ISBN 978-967-394-230-5 [PROCEEDINGS OF IDMAC2015]

9th ISDEV International Islamic Development Management Conference

(IDMAC2015) 604

THE INFLUENCE OF ASYMMETRIC INFORMATION AND COMPANY

INTERNAL FACTOR ON UNDERPRICING RATE OF LISTED

COMPANIES IN INDONESIA SHARIA STOCK INDEX AT THE TIME OF

INITIAL PUBLIC OFFERING (IPO) IN 2011 – 2013

Eka Yuniarti

student of Bachelor Program in Islamic Economics – Faculty of Economics and

Business -Universitas Airlangga

Email: [email protected]

Dina Fitrisia Septiarini, SE., MM.,Ak.

Syariah Economics Department – Faculty of Economics and Business - Universitas

Airlangga

Email: [email protected]

Abstract

Underpricing, a condition of stock price at primary market lower than the stock price

at secondary market, is one of the phenomenons that often happened in company's

Initial Public Offering (IPO) caused by several factors. This study examines those

factors, which are underwriter reputation, auditor reputation, company’s scale,

financial leverage, and profitability onlisted companies in Indonesia Sharia Stock

Index in 2011 – 2013 at the time of Initial Public Offering (IPO). This study using

multiple linear regression analysis with 5% significance level. Purposive sampling

method was used in this study, and there were 33 selected samples form 47

companies performing IPO. The result of multiple linear regression show that

company’s scale and financial leverage had significant effect to underpricing rate.

Meanwhile, underwriter reputation, auditor reputation, and profitability showed had

insignificant effect to underpricing rate.

Keywords: Underpricing, Initial Public Offering, Asymmetric Information, Indonesia

Sharia Stock Index.

mailto:[email protected]



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INTRODUCTION

Initial Public Offering (IPO) is one of several ways for a company to expand and

develop their business. The company will achieve excellent image and new capital

supply by doing the IPO. IPO process consist of several stages, one of them is IPO

pricing which is one of the effortful stage because there is not relevant IPO price

information. The company’s share never be traded in the market so it is difficult to

assess and determine the relevant price. This situation drives a phenomenon called

underpricing. Underpricing depicts a lower IPO price compared with the price when

it is sold in secondary market. The underpricing phenomenon occurs in almost every

country with various rate. The table below represents the research result of

underpricing rate in several countries:

Table 1: Underpricing Phenomenon in several countries

Country Researcher Sample Period Underprising

(%)

Australia Lee, Taylor, &Walter 266 1976-1989 11.0

Brazil Aggarwal, Leal &

Hernandez 62 1979-1990 78.0

China Datar & Mao 226 1990-1996 388.0

Finlandia Keloharju 85 1984-1992 9.6

Hongkong McGuinness, Zhao & Wu 334 1980-1996 15.9

India Krishnamurti & Kumar 98 1992-1993 35.3

Jerman Ljungqvist 170 1978-1992 10.9

Korea Dhatt, Kim & Lim 347 1980-1990 78.1

Malaysia Isa 132 1980-1991 80.3

Mexico Aggarwal, Leal &

Hernandez, Wethyavivorn 37 1987-1990 33.0

Thailand Koosmith 32 1988-1989 58.1

Turkey Kiymaz 138 1990-1995 13.6

Resource: Yolana and Martani, 2005 (conducted)

Some factors affecting the underpricing phenomenon are asymmetric of information

and internal factor of the company. Asymmetric information arise if the manager has

more information about internal and future prospect of the company than the

shareholders. Some variables potentially can force the underpricing rate are

underwriter reputation and auditor reputation. Mostly the underwriter reputation

become the investor’s consideration to invest in a company because the high

reputation underwriter can decrease the unspoken risk can’t be informed by the

prospectus and indicate that the private information from the issuer about the future

company’s prospect is correct (Kim, 1993). Auditor reputation has a strategic role in

IPO process as a party appointed by the company to audit the finance report. In the

investment activities, the investor not only considers the external factors such as

asymmetric information but also the internal factors such as company’s scale,

financial leverage, and profitability.

Company’s scale is measured by sum of financial assets in the end of the period

before the IPO. Generally a company with big scale is more popular than a small



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company (Handayani, 2008). Therefore, it is easier to find out all information about a

big company than the small one. Financial leverage is the company’s ability in

repaying the debt with its own equity. If the financial leverage is in high rate, the

company’s risk is in high rate as well because the higher financial leverage indicates

the higher risk of repaying failure (Sulistio, 2005). Profitability is measured by

Return of Asset (ROA) of the company. The higher profitability rate of the company

depicts the company’s ability to earn higher profit in the future.

According to the explanation above, the researcher intends to examine the influence

of asymmetric information and company’s internal factors with some of variables

including underwriter reputation, auditor reputation, company’s scale, financial

leverage, and profitability to the underpricing rate of companies accomplishing IPO

and listed in Indonesia Sharia Stock Index in 2011 – 2013.

Foundation of theory and Hypothesis Development

A. Capital market

Capital market is a place or facility meets the demand and supply of long

term financial instrument which is generally more than one year (Samsul,

2006:43).

B. Indonesia Sharia Stock Index

Indonesia Sharia Stock Index is a stock index portraying all of sharia stock

listed in Indonesia Stock Exchange (BEI). The constituent of Indonesia

Sharia Stock Index is all of sharia stock listed in Indonesia Stock Exchange

(BEI) and registered in Sharia Securities List (DES).

C. Initial Public Offering (IPO)

IPO is a stock offer in the primary market done by the company aiming to go

public (Hartono and Ali, 2002). According to UU No. 8 1995, Initial Public

Offering (IPO) is a stock offer performed by the issuer to the citizen base on

the capital market regulations and its operational regulations.

D. Underpricing

Underpricing is a result of stock price uncertainty in the primary market

because there is a price difference in the primary market caused by unbalance

information between the underwriter and the issuer called asymmetric

information. Main theories determining the underpricing are asymmetric

information and signalling hypothesis.

E. Asymmetric Information

Asymmetric information is one of the theories supporting the existing of

underpricing stock in IPO, where there is a party in the market which has

more information than others. This condition causes uncertainty, where

driving some deficiency risks because of the pricing errors.

F. Asymmetric Information in Islamic Perspective

Islam prohibits concealing information from sellers, buyers or all of parties in

the stock market. Concealing information is the most dangerous situation in



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stock market, meanwhile Islamic market is constructed by transparency, well

explanation, equality in rights and obligations for all of parties (Fayyadh and

As-Syahatah, 2004:60). The application in Islamic capital market, to prevent

the possibility of asymmetric information in the sale and purchase, DSN-MUI

has issued Implementation in Sharia Principle in Stock Trading Mechanisms

in a fatwa No: 80/DSN-MUI/III/2011 as a guideline.

G. Variable’s correlation

1. Correlation between underwriter reputation and underpricing rate

Excellent underwriters have skilful capability to organize IPO professionally

and provide better service to the issuer because they know well about market

condition and have many experiences in order to help the issuer in IPO,

therefore the excellent issuer will not decide low price for IPO stocks and the

successful probability of IPO will be higher (Hudiwinarsih and Ratnasari,

2013). A company using an underwriter service is able to minimize the

underpricing rate in IPO. It shows that underwriter reputation has negative

effect to the underpricing rate.

2. Correlation between auditor reputation and underpricing rate

High reputation auditors will maintain their reputation by providing the great

quality of finance report auditing. By using the high quality auditor, the

opportunity to provide inaccurate information in the market can be

minimized. So that, the better auditor capability to provide excellent auditing

for their client, the lower underpricing rate can be achieved (Suyatmin and

Sujadi, 2006). It shows that auditor reputation has negative effect to the

underpricing rate.

3. Correlation between company’s scale and underpricing rate

Generally a big scale company is more popular than the small one, so that the

investor is able to find all information about the big scale company easier and

the possibility of the uncertainty in the future will be lower (Suyatmin and

Sujadi, 2006). It shows that company’s scale has negative effect to the

underpricing rate.

4. Correlation between financial leverage and underpricing rate

Financial leverage portrayed by Debt to Equity Ratio (DER) is company’s

capability in fulfilling its obligation represented by percentage of its own

capital to repaying its debt. Higher financial leverage depicts higher risk of

the company and the investor will avoid stocks with high financial leverage

rate (Ang, 1997 in Puspita, 2011). Therefore, the higher financial leverage

rate indicate the higher underpricing rate (Daljono, 2000). It shows that

financial leverage scale has positive effect to the underpricing rate.

5. Correlation between profitability and underpricing rate

Return on Asset (ROA) is a ratio measuring the management capability in

order to generate income from the asset management (Kasmir, 2003:63). The

higher ROA indicate the more effective company’s management to manage

the asset in order to achieve higher profit after tax. The higher ROA depicts



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the more effective company’s performance, because the income rate will be

rising (Brigham, 2001:90). The high profitability of a company will decrease

the uncertainty for the investor, so that it will decline the underpricing rate

(Ghozali and Mansur, 2002). It shows that profitability has negative effect to

the underpricing rate.

H. Hypothesis

H1 : Underwriter reputation has significantly negative effect to the underpricing

rate.

H2 : Auditor reputation has significantly negative effect to the underpricing rate.

H3 : Company’s scale has significantly negative effect to the underpricing rate.

H4 : Financial leverage has significantly positive effect to the underpricing rate.

H5 : Profitability has significantly negative effect to the underpricing rate.

I. Analysis Model

The multiple regression’s equation of this research is:

Description:

Y = Underpricing rate

a = constant

1-5 = regression coefficient of independent variable

X1 = Underwriter reputation

X2 = Auditor reputation

X3 = Company’s scale

X4 = Financial leverage

X5 = Profitability

e = error

As stated by the equation above, the analysis model of this research is:

Figure 1

RESEARCH METHOD

A. Research approach



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The approach used in this research is quantitative approach where the

variable effect can be identified and the correlation each variables can be

measured well.

B. Variable identification

Variables in this research consist of dependent variable (Y) and independent

variables (X). The dependent variable of this research is underpricing rate and

the independent variables are underwriter reputation (X1), auditor reputation

(X2), company’s scale (X3), financial leverage (X4), and profitability (X5).

C. Variable’s operational definition

Variable’s operational definitions in this research are:

1. Underpricing

Underpricing rate is interpreted by initial return (IR), positive difference

between stock price in secondary market (P1) and the initial price in primary

market (P0) (Isnurhadi, 2008). The initial price list and the closing price at

the first day of primary market are able to be collected in IDX Fact Book

2011 – 2013.

2. Underwriter reputation

Underwriter reputation is measured by using Yolana and Dwi Martani (2005)

method, marking with 1 to the top 10 underwriter and marking with 0 to the

rest of list in Most Active IDX Members in Total Frequency. The underwriter

name and its reputation lists can be collected in IDX Fact Book 2010 – 2013.

3. Auditor reputation

Auditor reputation is measured according to an assumption: if the issuer use

“big four” auditor, it will be given scale: 1 and if it does not, it will be given

scale: 0 (Nurhayati and Indriantoro, 1998 in Suyatmin and Sujadi 2006). The

auditor name list can be collected in each company’s financial report

downloaded in BEI website (http:/www.idx.co.id).

4. Company’s scale

Company’s scale can be identified by the total asset in the latest company’s

financial report before the company performing IPO. Company’s total asset

data is able to be collected in each company’s audited financial report by

downloading in BEI website (http:/www.idx.co.id).

5. Financial leverage

Financial leverage portrayed by Debt to Equity Ratio (DER) is company’s

capability in fulfilling its obligation. Total debt and total equity data of each

company are collected in the latest company’s financial report before the

company performing IPO by downloading in BEI website

(http:/www.idx.co.id).

6. Profitability



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Company’s profitability can be seen in Return on Asset. Total asset and

income after tax data of each company are collected in the latest company’s

financial report before the company performing IPO by downloading in BEI

website (http:/www.idx.co.id).

D. Type and resource of the data

Type of data used in this research are secondary data such as financial reports

and annual reports of companies listed in Indonesia Sharia Stock Index

performing IPO and experiencing underpricing in 2011 – 2013. The data

collecting method is cross section method, collecting data in several times

and places (Sugiono, 2004:87). All data needed are able to be collected in

each company’s audited financial report, BEI website and IDX Fact Book.

E. Population and sample

Population of this research is 47 companies performing IPO listed in

Indonesia Sharia Stock Index in 2011-2013. From 47 companies only 33

fulfil the criteria, therefore samples of this research are 33 companies.

F. Analysis technic

This research use multiple linier regression and simple linier regression

adapted to the purpose of the research which is to find out the effect of

independent variable to the dependent variable simultaneously and partially.

In addition, to fill the BLUE requirements (Best Linear Unbias Estimator),

classic assumption test is also performed. The classic assumption test consist

of normality test, multicollinearity test, heteroskidastity test, autocorrelation

test. On the other hand, T test is performed to recognize the significant effect

of independent variable to the dependent variable and to examine the

hypothesis.

RESULT AND ANALYSIS

A. Normality Test

Result of the normality test in this research depicts that the residual value was

distributed normally. It is shown by normal probability plot graphic portraying the

dots not far away from the diagonal line.



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Figure 2: Normality Test

Resource: Processed data by SPSS

B. Multicollinearity Test

Multicollinearity test result states that there was not variable with VIF value under

10. This result describes that every independent variable models did not have

muticollinearity symptom in the regression model.

Table 2: Multicollinearity Test

Resource: Processed data by SPSS

C. Heteroscedastic test

The scatterplots graphic portrays the dots spreading randomly at above and below 0

at Y-axis. It represent that there was not Heteroscedastic symptom in this research

model.



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Figure 3: Scatterplots Graphic

Resource: processed data by SPSS

D. Autocorrelation test

Durbin-Watson value of autocorrelation test was 1.394 between dU value (1.577 and

(4-dU) = 2.423. the result states that there was not autocorrelation problem in

regression model.

Table 3: Durbin-Watson test


E. Multiple linier regression analysis and hypothesis test

Table 4: Simultaneous regression test


Table 4 depicts the result of simultaneously test that the value of F was 2.119 and the

significant rate was 0.094 more than 0.05. The result represented that collectively all

variables, underwriter reputation, auditor reputation, company’s scale, financial

leverage, and profitability did not have simultaneous effects to the underpricing rate.



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Partially regression test using T test was performed to find out the effects of each

independent variables to the dependent variable. The result is in the table below:

Table 5:Simultaneous regression test


According to table 4.4, the regression’s equation was:

Y = – 0.004Underwriter – 0.117Auditor – 0.085FirmScale + 0.171FLeverage –

0.003Profitability.

a. The significance rate of underwriter reputation was 0.482 more than 0.05. It

sated that there was not significant effect of underwriter reputation to the

underpricing rate.

b. The significance rate of auditor reputation was 0.281 more than 0.05. It sated

that there was not significant effect of auditor reputation to the underpricing

rate.

c. The significance rate of company’s scale was 0.042 smaller than 0.05. It sated

that there was significant effect of company’s scale to the underpricing rate.

d. The significance rate of financial leverage was 0.482 smaller than 0.05. It

sated that there was significant effect of underwriter reputation to the

underpricing rate.

e. The significance rate of profitability was 0.690 more than 0.05. It sated that

there was not significant effect of profitability to the underpricing rate.

ANALYSIS

The effect of Underwriter reputation to underpricing rate

Result of this research interprets that underwriter reputation has not significant effect

to underpricing rate. The result is supported by a research result done by Yolana and

Martani (2005) representing underwriting reputation did not has significant effect to

underpricing rate. The negative mark of the coefficient means that the higher

underwriter reputation will drive the underpricing to get lower. It is supported by

Carter and Manaster (1990) theory that underwriter with good reputation tend to

choose high reputation company to minimize the underpricing. On the other hand,

underwriter with negative reputation avoids the underpricing rate by giving lower

price in IPO, where it actually drives the underpricing higher.



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Underwriter reputation was indicated to be one of the variables affected to

underpricing rate. But the insignificant result in this research is predicted because of

the difference sampling method and the difference of underwriter reputation grade

judging, where in Indonesia there is not legal organisation performing underwriter

reputation review annually (Yolana and Martani, 2005).

The effect of auditor reputation to underpricing rate

This research states that there was not significant effect of auditor reputation to the

underpricing rate. It is similar with a research result done by Rosyati and Sebeni

(2002) showing that auditor reputation did not has significant effect to the

underpricing rate. The negative mark of the coefficient means that the higher auditor

reputation will drive the underpricing to get lower. It is supported by Suyatmi and

Sujadi (2006) explaining auditor quality had effect to financial report credibility

when a company performing IPO, and if the company had a positive financial report,

the underpricing was able to be minimized.

Auditor reputation in this research did not has significant effect to the underpricing

rate. It is predicted because the investor considering the financial report audited by

high reputation auditor has nothing to do with the price determining in IPO

(Cahyanda, 2009). Therefore, the investors do not mind about the auditor reputation

as long as the auditing process filling the financial report auditing qualification.

The effect of company’s scale to underpricing rate

In this research states that company’s scale had significant effect to the underpricing

rate. This result supported by Yolana and Martani (2005) research portraits that the

company’s scale had significant effect to the underpricing rate. The significant effect

exists because the uncertainty of company’s value in the future intervening the

investor decision to buy the stock. Generally, the big company’s uncertainty is lower,

because it will not intervened by the market condition, contrary it will intervene the

market. On the opposite, the small company uncertainty in the future is bigger,

therefore the company’s risk will increase in long term period (Nurhidayati and

Indriantoro, 1998).

The effect of financial leverage to underpricing rate

According to the result of this research, financial leverage had significant effect to

the underpricing rate. This result different with Handayani’s (2008) research result

explaining that financial leverage did not has significant effect to the underpricing

rate.

Financial leverage portraits the risk rate of the company and represent the company’s

capability to repay its debt with its own capital. In order to determine the investment

decision, investor will consider the financial leverage report because the higher

financial leverage representing higher company’s risk (Ang, 1997 in Puspita 2011)

and effecting to the stock price uncertainty and the investor income. Company with



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high financial leverage drives its stock demand lower and increases its underpricing

rate in IPO.

The effect of profitability to underpricing rate

The research result shows that profitability did not has significant effect to the

underpricing rate. This result similar with Hadayani’s (2008) research result

representing profitability had significant effect to the underpricing rate. But, the

negative mark of the coefficient means that the higher profitability will drive the

underpricing rate to get lower and minimize the investor doubt to buy the stock.

The profitability did not has significant effect because investor assume that the

financial report of company performing IPO can’t explain the real performance of

the company, therefore the investor tend to ignore the profitability rate in order to

decide the investment decision.

CONCLUSION

According to the research result, the conclusions are:

a. Underwriter reputation (H1) did not has significant effect to the underpricing

rate.

b. Auditor reputation (H2) did not has significant effect to the underpricing rate.

c. Company’s scale (H3) had negative and significant effect to the underpricing

rate.

d. Financial leverage (H4) had positive and significant effect to the underpricing

rate.

e. Profitability (H5) did not has significant effect but had negative effect to the

underpricing rate.

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Eka Yuniarti & Dina Fitrisia Septiarini

Economy & Finance