Indonesian IPO Initial Returns in Hot and Cold Markets

Dezie Warganegara
Binus University International
Indonesia

Abstract:
This study focuses on IPO Initial Returns in Hot and Cold Markets at the Jakarta Stock Exchange (JSX) between the period of 2001 and 2005. It is found that Hot and Cold Markets do exist at the JSX. More importantly, it is found that the difference in IPO Initial Returns between Hot and Cold Markets while controlling for other factors is 36.8%. Lowry (2003) and Helwege and Liang (2004) note that the Investment Sentiment Hypothesis has been found to explain the existence of Hot and Cold Markets and imply that jumps in IPO Initial Returns during Hot Markets are due to the increase in the first day closing prices which are higher than the increase in the offering prices.

This study offers a new possibility that during Hot Markets, the first day closing prices increase while the offering prices decrease. The Monopsony Power Hypothesis as advanced by Ritter (1984) provides an alternative explanation to the phenomenon. Investment banker community in a small economy has full information on the number of firms that will go public in the following period. Given that investment bankers take side with institutional investors, they attempt to lower offering prices on behalf of these influential clients. As a result, in the Hot Market, the first day closing prices are higher due to a wild bullishness of investors and the offering prices are lower due to a high bargaining power of investment bankers.