An insight into the signaling role of Sharia status: a case from an emerging IPO market

Ali Albada
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Abstract

Purpose

This study aims to examine the potential of Sharia status as ex ante information to signal the quality of an issuing firm by improving the decision-making process of potential investors when assessing initial public offerings (IPOs) in an environment where information asymmetry is pronounced. Potential investors face challenges in evaluating and determining the true value of IPO issues, which inherently influences their decision-making. Consequently, this results in pronounced price fluctuations in IPO shares, leading to higher underpricing.

Design/methodology/approach

This study uses a sample of 350 IPOs listed on the Kuala Lumpur Stock Exchange (KLSE) between 2004 and 2021 to examine the signaling role of Sharia-compliance status. A three-model approach is used to ensure that the study's objectives are met. The first model investigates the effect of Sharia status on underpricing to determine whether the main beneficiary of such a signal is the investor or the issuer. The second model examines the effect of Sharia status on investor demand to determine if such a signal influences prospective investors' investment decision-making processes. The third model inspects the effect of Sharia status on investor divergence of beliefs to measure the signal's ability to reduce information asymmetry within the Malaysian IPO market.

Findings

The Malaysian IPO market relies heavily on the fixed-price mechanism, which exacerbates high information asymmetry, affecting potential investors' behavior, asset price formation and return generation on the first day of listing. The study results indicate that Sharia status does not have any signaling role in the Malaysian IPO market. This is because investors in the Malaysian market are driven by ex ante information that helps unveil relevant information that leads to capital gains. Furthermore, most new issues in the Malaysian IPO market fall under Sharia status, diluting the relevance of such information for prospective investors in determining profitable investments.

Practical implications

The findings highlight the challenges faced by issuing firms in estimating market demand due to limited premarket insights and the difficulties prospective investors face in identifying the quality of issuing firms. Efforts to provide more information on investor demand can reduce uncertainty and facilitate more informed decision-making.

Originality/value

This research stands as one of the pioneering efforts to provide an empirical explanation of the potential signaling influence of Sharia status in an emerging IPO market.

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深入了解伊斯兰教法地位的信号作用:一个新兴 IPO 市场的案例
目的 本研究旨在探讨在信息不对称明显的环境下,伊斯兰教法地位作为事前信息,通过改善潜在投资者评估首次公开发行股票(IPO)的决策过程,来提示发行公司质量的潜力。潜在投资者在评估和确定首次公开发行股票的真实价值时面临挑战,这从本质上影响了他们的决策。本研究以 2004 年至 2021 年间在吉隆坡证券交易所(KLSE)上市的 350 家 IPO 为样本,研究伊斯兰教法合规状况的信号作用。为确保达到研究目标,我们采用了三种模型方法。第一个模型研究伊斯兰教法地位对定价过低的影响,以确定这种信号的主要受益者是投资者还是发行人。第二个模型研究伊斯兰教法地位对投资者需求的影响,以确定这种信号是否会影响潜在投资者的投资决策过程。第三个模型考察伊斯兰教法地位对投资者信念分歧的影响,以衡量该信号在马来西亚 IPO 市场中减少信息不对称的能力。研究结果马来西亚 IPO 市场严重依赖固定价格机制,这加剧了高度的信息不对称,影响了潜在投资者的行为、资产价格的形成以及上市首日的回报产生。研究结果表明,伊斯兰教法地位在马来西亚 IPO 市场中没有任何信号作用。这是因为马来西亚市场的投资者受事前信息的驱动,而事前信息有助于揭示相关信息,从而带来资本收益。此外,马来西亚 IPO 市场上的大多数新股发行都属于伊斯兰教法管辖范围,这就削弱了这些信息对潜在投资者确定有利可图的投资的相关性。努力提供更多有关投资者需求的信息可以减少不确定性,促进更明智的决策。原创性/价值这项研究是对伊斯兰教法地位在新兴 IPO 市场的潜在信号影响进行实证解释的开创性工作之一。
本文章由计算机程序翻译,如有差异,请以英文原文为准。
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来源期刊
CiteScore
5.40
自引率
10.00%
发文量
45
期刊介绍: The International Journal of Islamic and Middle Eastern Finance and Management (IMEFM) publishes quality and in-depth analysis on current issues within Islamic and Middle Eastern finance and management. The journal welcomes strong evidence-based empirical studies and results-focused case studies that share research in product development and clarify best practices. The title is also keen to consider work from emerging authors. IMEFM has just also accepted into Clarivate''s SSCI in 2018, and its IF will be available in summer 2019, with citations dating from 2016. The coverage includes but is not limited to: -Islamic finance: Fundamentals, trends and opportunities in Islamic Finance, Islamic banking and financial markets, Risk management, Corporate finance, Investment strategy, Islamic social finance, Financial planning, Housing finance, Legal and regulatory issues, -Islamic management: Corporate governance, Customer relationship management and service quality, Business ethics and corporate social responsibility, Management styles and strategies in Shariah environments, Labour and welfare economics, Political economy. The journal is the only title aiming to give an interdisciplinary and holistic view on Islamic finance and business management practices in order to inform these two intertwined communities.
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