PERFORMANCE OF INITIAL PUBLIC OFFERINGS: DOES SHARIAH COMPLIANCE EXTENSIVENESS MAKE A DIFFERENCE?

Transcription

1 Volume: 2 Issues: 6, pp Internatonal ournal of Accountng, Fnance and Busness eissn: ournal webste: PERFORMANCE OF INITIAL PUBLIC OFFERINGS: DOES SHARIAH COMPLIANCE EXTENSIVENESS MAKE A DIFFERENCE? * Zunadah Sulong 1, Nor Azzan Che Emb 2 and Mohd Rahm Arffn 3 1 Faculty of Economcs and Management Scences Unverst Sultan Zanal Abdn Gong Badak Campus, Terengganu, Malaysan. E-mal: zunadah@unsza.edu.my. 2Kullyyah Economcs and Management Scences Internatonal Islamc Unversty of Malaysa 3 Faculty of Islamc Contemporary Studes Unverst Sultan Zanal Abdn Accepted date: 2 December 2017 Publshed date: 15 anuary 2018 To cte ths document: Sulong, Z., Emb, N. A. C., & Arffn, M. R. (2017). Performance of Intal Publc Offerngs: Does Sharah Complance Extensveness Make A Dfference? Internatonal ournal of Accountng, Fnance and Busness (IAFB), 2(6), Abstract: Despte the popularty and the clam that Sharah companes fare better than ther conventonal counterparts, both prevous studes and market reports show that the Sharahcomplant status does not seem to contrbute postvely to the Sharah IPO ntal performance. Ths study hypotheszes that ths could be due to () the characterstc dfferences between the Sharah IPOs and therconventonal counterparts and () the nadequacy of pre-revson Sharah screenng methodology snce establshment n 1995 to 2013, n whch neglects two crucal fnancal ratos, debt and ARTA (account recevable to total asset), whch are emphassed by the Fqh Councl. Thus, ths study s conducted wth the obectves: () to ascertan the mpact of Sharah extensveness on the IPO ntal performance; and f ths s so, () to what extent the Sharah status and level of complance nfluence ntal performance. Ths study employs a sample of 153Sharah IPOs ssued by Malaysan companes from anuary 2005 untl December Consstent wth past studes, the results show that there are no sgnfcant dfference between the ntal performance of Sharah and non-sharah IPOs, even after controllng for the IPO characterstcs. However, when the level of extensveness s taken nto consderaton, the dfference n the ntal returns prevals.overall, ths study contrbutes by provdng evdence that the exstng Sharah screenng crtera should ncorporates the two fnancal ratos (debt and ARTA) n order to dstngush the Sharah IPOs from ther non- Sharah counterpart. Keywords: Intal Publc Offerngs (IPOs) Sharah IPOs Sharah Complance Extensveness Introducton The current global trend exhbts that there s a shft n the demand for ethcal nvestment partcularly those wth Sharah-complant status. In fact companes that undergo the Sharahcomplant screenng process and hold the Sharah complant status are bascally recognzed as 190

2 the nvestment wth the core market actvtes that are free from unethcal elements. In essence, the elements of certanty, ntegrty, ustce and accountablty n the screenng process of Sharah status, dfferentate the qualty of the IPOs of the Sharah-complant wth the shares traded wthout the status. The nvestment wth Sharah-complant status s desgned not only for the benefts of Muslms nvestors partcularly those who are concerned about Sharah complancy of ther nvestment but t are meant for all nvestors. However, t s documented n the lterature that the Sharah-complant status does not seem to contrbute to IPO ntal return performance dfferental between Sharah-complant companes and ther non-sharah counterparts (for example, Abdul Rahm & Yong, 2008). It s predcted that relyng on the Sharah screenng process by Sharah Advsory Councl (SAC) may not be suffcent as there are two mportant ratos whch are debt rato and account recevable over total asset rato (ARTA rato) hghlghted by Fqh councl that are not beng used. Among the recent ndcators on the nsuffcent fnancal rsk control elements n Sharah-complant lsted companes whch hghlght the MyETF Dow ones Islamc Market Malaysan Ttan 25 fnancal performance n Although the portfolos consst of publc lsted companes wth Sharahcomplant status, the performance tumbled down durng the year t was launched whch trggered the nvestors and researchers to queston the Sharah screenng process that had already been undergone by the lsted companes. It can be argued that the degree of Sharah-complant extensveness n IPOs wll be benefcal to evaluate the frm s rsk. Ths s because the maorty of Malaysan lsted companes possess Sharah-complant status. Ths paper focuses on the Sharah screenng methods, partcularly the general rule for fnancal rato screenng whch mposes certan lmts on the debt rato and ARTA rato. The Councl of the Islamc Fqh Assocaton or CIFA 1993 resoluton (Naughton & Naughton, 2000) and some Accountng and Audtng Organzaton for Islamc Fnancal Insttuton (AAOIFI) standards are used n classfyng the Sharah-complant extensveness even though the Securtes Commsson Malaysa apples the Islamc Fnancal Servces Board (IFSB) standard. The Executve Drector of Internatonal Sharah Research Academy for Islamc Fnance or ISRA (Mohamad Akram, 2006) also has hghlghted the need to examne not only the company s ncome but also the total debt of the company, ts cash and nterest bearng securtes and the account recevables. The man purpose of ths paper are two folds; frst, to ascertan the mpact of Sharah extensveness on the IPO ntal performance; and second, f t s so, to what extent the Sharah status and level of complance nfluence ntal performance. The rest of the paper s structured as follows. Secton 2 provdes a revew of the related lterature and hypotheses. Secton 3 presents the varables and methodology. Secton 4 dscusses the emprcal results. Secton 5 concludes. Bref Lterature Revew and Hypotheses The Councl of the Islamc Fqh (CIFA). Two basc flters approved by CIFA n 1993 are used to dentfy the equty nstruments as Sharah permssble nvestment or to be classfed as Sharah-complant: (a) The prmary busness actvtes of the company must be legally free (halal) from actvtes that nvolve alcohol, tobacco, pork-related products, conventonal fnancal servces, weapons and non-permssble entertanment. 191

3 (b) The fnancal management of the company should be free from rba (nterest) and mpurtes. The followng ratos are the rules used by CIFA to screen out companes that have any of the below crtera: () havng a debt to total asset rato of thrty-three percent or more, () mpure plus non-operatng nterest ncome to revenue rato of fve percent or more, and ()Accounts recevable to total asset rato of forty-fve percent or more. The benchmark of one-thrd s bascally referred as the maxmum proporton of asset that each leader n the famly can gve out. Ths proporton s based on hadth narrated by Bukhar and Muslm. It bascally supports the queston of the legacy of Sa ad Ibn Ab Waqas who wants to leave hs property as alms. The Prophet s.a.w. s condton of 1/3 (33.33%) can also be consdered as the benchmark for debt usage. Ths s because the two-thrd of property for the famly members can only be acheve f the borrowng level does not exceed 1/3 of the total asset. The debt ssues are among the man concern that wll be rased upon and should be settled before the deceased property s dvded among the benefcary. Below are the hadth narrated by Bukhar and Muslm: One day, the Prophet s.a.w. vsted Sa ad bn Ab Waqas who was ll. Sa ad expressed to the Prophet s.a.w. hs feelngs that hs llness was comng to an end and that death was near. He asked for the Prophet s.a.w. sopnon on gvng hs property away as alms for he had only one daughter to nhert hs wealth. Therefore, he wshed to gve as alms 2/3 of hs property. However, the Prophet s.a.w. stated hs obecton. Then Sa ad asked whether he could gve away 1/2 of hs property. The Prophet s.a.w. stll sad no and recommended that 1/3 s enough. The Prophet s.a.w. then sad: that too s stll too much. Verly, to leave your her wealthy s far better than to leave you her mpovershed and dependant on other people s charty. The above hadth has been used to set the bass for maxmum level of borrowng for the enttes.e., thrty three percent or one thrd of the total asset value. The proporton of debt that exceeds the benchmark of one thrd of the total asset value wll expose the companes wth the bankruptcy rsk and busness rsk whch may lead to uncertanty on future prospect of the busness. In the context of the stablty of the contract that the ndvdual wants to enrol nto, the ssue of gharar s among the man concern n Fqh Muamalat. Gharar means uncertanty and cheatng (see the dscusson on gharar defnton-resoluton of the Securtes Commsson Sharah Advsory Councl Sharah Advsory Councl, p. 155). It s a negatve element that can damage a contract. However, should t arse n a small magntude, Islamc ursprudence consders t as common consequence n busness transacton and wll not harmfully affect the contract s goodwll. Therefore, the features of such a company should be wthn the tolerable bounds of the Islamc ursprudence and s allowable f the uncertanty level s low. The bass of the prohbton on gharar s based on a hadth of the Prophet s.a.w narrated by Muslm (see, the gharar prohbton ssues-resoluton of the Securtes Commsson Sharah Advsory Councl p.149). Meanng: Verly, the Prophet s.a.w. prohbts gharar transactons. Therefore, as suggested by the Councl of Islamc Fqh, the nvestors should consder the account recevables proporton from the total asset amount n order to dentfy the amount of assets that are certanly owned by any entty. The element of transparency helps reduce the 192

4 element of uncertanty. In dealng wth busness transactons, the Islamc rules really take the ssues of gharar serously. Accordng to Syaf e Mazhab, gharar s defned as somethng wth hgh rsk. Ths s also supported by another urst from Mazhab Syaf e whch s Al-Syraz who defned gharar as somethng that have unknown condton and consequences. The dscusson on the gharar ssues by SAC hghlghted the nterpretatons by Al-Sharqaw, Al-Qalyub and Al-Raml that defned gharar as somethng wth postve and negatve elements whereby, the negatve element exceeds the postve element. Based on the above dscusson on the defnton of gharar, ths study supports the CIFA decson to screen out the companes accounts recevable to total asset rato of forty-fve percent or more. As far as ths study s concerned, there are no specfc verses from Al-Quran or hadth that specfy the benchmark for account recevables proporton over total asset. It s beleved that the need of such benchmark s ntated through the dscusson by Islamc scholars or mak ulamak as t s among the secondary sources for makng decson. Imak means unanmous agreement among the qualfed scholars of the Muslm communty on Sharah rulngs mposed durng a partcular perod after the death of the Prophet s.a.w (refer Resolutons of the Securtes Commsson Sharah Advsory Councl, p. 9). The secondary sources that can be used as a bass for decson makng n Islamc ursdcton are mak, qyas, maslahah, stshsan and others. It only can be used after the matter n queston s not found n prmary sources Refer Resolutons of the Securtes Commsson Sharah Advsory Councl, p. 8-12). In order to avod uncertanty for the share market s nvestors, the realstc percentage of assets that are defntely owned by the companes should be postve or more than the value of assets that are stll n doubtful condtons. Therefore, the proporton of assets that should be the least certanly held by any entty s ffty fve percent whch s exceedng the proporton of assets under uncertan condton whch s only forty fve percent. Wth ths benchmark ncluded n the screenng process for Sharah-complance status, the nvestors would at least nvest n companes wth stable and convncng fnancal condton. Lstng structure of Malaysan IPOs Intal Publc Offerngs (IPOs) are defned as new ssues that are sold to nvestors for the frst tme. The new shares are traded n a prmary market. Due to the new ssues perceved to be sold based on the offer prce below the true values of the IPO, the actvty of flppng on the frst day of tradng n order to realze quck return s a common stuaton n most share markets. In order to examne the post lstng performance, the structure of Malaysan share market tradng should be clarfed frst, as every country s shares market has ts own unque characterstcs. The nsttutonal aspects of Malaysan IPOs dffer from other markets n many dfferent ways. There are two mportant features that lead to unqueness of Malaysan IPOs durng the perod of study from such as the Sharah-complant status and thrty percent of Bumputra mandatory requrement. In IPO tradng systems, there are three partes nvolved n IPO ssuance whch are the ssung frms, the underwrters and the nvestors. Bascally, the players n the stock market are dvded nto two categores: ndvdual nvestors (retal nvestors) and nsttutonal nvestors. Insttutonal nvestors are regarded as nformed nvestors whle retal nvestors are consdered unnformed nvestors. Investment bankng plays an mportant role n IPO ssuance. The bank acts as underwrter and helps to dstrbute a new securtes ssue n the prmary market. 193

5 Normally, ther clents are the companes that wll seek the nvestment banker s advce on how to get captal or on how to rase funds through equtes. In order to sell the IPOs, there are three types of sellng mechansms beng used n share tradng. These are auctons, book buldng concepts and fxed-prced offers. Bascally, IPOs n Malaysa are sold usng the fxed-prce offer mechansm whle other country lke U.S.A uses bookbuldng mechansm. In Malaysa, the applcaton for IPO s submtted for approval to the Foregn Investment Commttee (FIC), and Mnstry of Internatonal Trade and Industry (MITI). It then s submtted to the SC for approval where t examnes the company forecast profts and dvdends. The SC lmts the market s role n the determnaton of the subscrpton prce. Most Malaysan IPOs fall wthn the category of three types of new ssues: publc ssue, offers for sale or a hybrd of publc ssue and offer for sale. Publc ssues refer to the IPOs offered to the publc for the frst tme. They are usually allocated to ndvdual nvestors better known as retal nvestors. The mplcaton of the ssuance of these new shares wll result n an ncrease n the pad up captal of the company. The publc ssues are known as prmary shares. Currently, companes gong for IPO must have 25% of shares n publc hands and have Bumputras holdng 30% shares under FIC rules. Offer for sale are bascally shares allocated to the orgnal shareholders (owners), but then offered to the publc to buy. The owner s dscouraged from sellng shares before the expraton of the lock-up perod. In Malaysa, the orgnal shareholders cannot mmedately sell and transfer the IPOs. The Securtes Commsson has already mposed the regulaton on the orgnal shareholder or the owner, pertanng to the sale of the shares that they own. Ths s somehow not mposed on the retal and nsttutonal nvestors. In Malaysa, the owner-managers need to face the lock-up perod of three years before they can proceed to sell ther shares n the secondary market. The lock-up perod bascally s an agreement between the underwrter and the ssung frm prohbtng the sale of shares by nsders for a certan perod of tme. The lockup perod averages around sx months n other countres such as the U.S.A. Lastly, prvate placement refers to the IPOs offered to nsttutonal nvestors. Methodology The data set conssts of all Sharah-complant IPOs ssued from anuary 2005 untl December 2014 whch s lsted on the Man Market of Bursa Malaysa (prevously known as the Kuala Lumpur Stock Exchange or KLSE). As n Aprl 1999 the Bourse ntroduced ts frst Sharah ndex, well-known as the Kuala Lumpur Sharah Index (KLSI). Ths Islamc ndex outlnes the performance of Sharah-complant shares on Bursa Malaysa. At the end of 2008, as n 2009 the Bursa Malaysa combned the man board and the second board together. The lstng board was then called as the Man market whle the MESDAQ was then ntroduced as the ACE market. Ths study s fully aware on the effort by Bursa Malaysa and SC to upgrade the Malaysan equtes market n Prevously, the allocatons of new ssues for nsttutonal nvestor were group together under the publc ssue category. However, the prvate placement category has been separated from publc ssue category n Snce then, Malaysan IPOs are classfed nto offer for sale, publc ssue and prvate placement. Ths study also fnds that n 2004 SC has ntroduced the pre-ipo Sharah status. 194

6 There are two data set whch employed n ths study; pre-lstng and post-lstng. Pre-lstng data ncludes consoldated amount of total debt (TD), account recevables and total asset (TA). Moreover, t also ncludes three-year earnngs before nterest tax, deprecaton and amortzaton (EBITDA), proft after tax (PAT), subscrpton/offer prce, sector, board of lstng, IPO proceeds utlzaton, offer sze, age of the company, and underwrter reputaton. Meanwhle post-lstng data set ncludes openng and closng prces, subscrpton rato, ownershp structure, and total number of IPOs. These data are obtaned from the Bursa Malaysa s webste and customer servce unt, Securtes Commsson webste and t s Islamc Captal Market Unt, company s prospectus and annual report, Investors Dgest, Star on-lne and OSIRIS database. The Sharah status of the company s determned based on the lst publshed by the Sharah Advsory Councl (SAC) of Securtes Commsson. The populaton and sample used n ths study s as reported n Table 1. Durng the 10-year perod, covered n ths study, there are a total of 426 new ssues. Smlar to Abdul Rahm and Yong (2008) and Yong (2007b), ths study selects sample of IPOs that are offered as publc ssue, offer for sale, prvate placement, hybrd of these forms, and/or hybrd of any of these forms and other type of ssues. The study however excludes the rarely type of IPOs, for example restrcted offer for sale, restrcted publc ssue, restrcted offer for sale to elgble employees, restrcted offer for sale to Bumputra nvestors, specal and restrcted ssue to Bumputra nvestors, tender offer and specal ssue. The study also excludes IPOs ssued under REITS category due to dfferent format of presentaton for ts fnancal statement. The reason to exclude the companes wth the uncommonly types of offer s due to only small numbers of companes wth ths ssues that lead to less meanngful outcomes suggested n Abdul Rahm and Yong (2008) and Yong (2007b). Table 1: The statstcs of IPOs samples by year of lstng, 2005 to 2015 Lstng Year IPO Sample IPOs Sharah- Non-Sharah Drop case populaton Complant IPOs Complant IPOs TOTAL IPOs Note: The Sharah classfcaton s based on the lst publshed by the Sharah Advsory Councls of Securtes Commsson as of October/November, , and lst provded by Knowledge Centre Bursa Malaysa, The Sharah Complance Extensveness Framework The Sharah-complant extensveness s defned as the publc lsted companes that undergo the Sharah screenng process whch ncludes all the three types of fnancal ratos suggested by CIFA such as nterest ncome rato, debt rato and account recevable over total asset rato. Prevously, the SAC practce n dentfyng lsted companes as Sharah complance s based on the quanttatve method and qualtatve method mentoned n secton 2. In classfyng the 195

7 securtes as Sharah-complant, the SAC receved the nformaton from the SC. The SC gathered nformaton on the lsted companes from varous range of sources, such as company annual fnancal reports, company responses to survey forms and through nqures made to the respectve company s management. Based on the outcomes of these methods, the lsted frms are further classfed accordng to certan benchmarks (5 percent, 10 percent, 20 percent and 25 percent) of the prmary actvtes of the companes that nvolve non-permssble elements. However, ths nformaton s not publshed by the Securtes Commsson (SC) but only reveals the fnal status of the Sharah applcaton. Because of the unavalablty of the SAC benchmark screenng data for publc users, ths study has no choce but to rely on the basc screenng crtera or the general rules used by the Councl of the Islamc Fqh (CIFA) as well as by the Accountng and Audtng Organzaton for Islamc Fnancal Insttuton (AAOIFI). Snce the rest of the study concentrates on the mpact of the extensveness of Sharah complance on the IPOs performance, ths study segregates the Sharah IPOs nto four groups accordng to ratos used n the CIFA second ter of Sharah screenng test. Bascally, CIFA suggested that the frst crteron requres that the lsted companes must be free from rba (nterest). Due to the dffculty n montorng the use of nterest-free debts among the lsted companes, Sharah councl mpose several ratos n ther second crtera to help to dentfy the companes fnancal management status. The screenng out process by CIFA on the fnancal management of the companes through three types of ratos: () debt to total assets rato of 33 percent or more. () Impure plus non-operatng nterest ncome to revenue rato of 5 percent or more. () Accounts recevable to total assets rato of 45 percent or more. For the purpose of ths study, the extensveness of Sharah complance are measured based on two of the ratos: () Debt to total assets rato. The sample wll be parttoned nto two sub-samples accordng to the medan of the sample s debt rato. The hgh Sharah complance sub-sample conssts of frms wth less than medan debt ratos, whle the low Sharah complance sub-sample conssts of frms wth debt ratos more than the medan value. The medan value for debt to total assets rato s percent. () Accounts recevable to total assets rato (ARTA rato). The sample wll agan be parttoned nto two sub-samples accordng to the medan of the sample s ARTA rato. The hgh Sharah complance sub-sample conssts of frms wth less than medan ARTA ratos, whle the low Sharah complance sub-sample conssts of frms wth ARTA ratos more than the medan value. The medan value for ARTA ratos s percent. These descrptons show that ths study devates slghtly from the benchmarks outlned by CIFA (refer to footnote 5) wth respect to the operatonalzaton of the levels of debt rato and ARTA rato. The ustfcatons for usng medan values nstead are as follows. Followng the CIFA orgnal benchmark level wll create uneven sample sze for each quadrant bascally because t puts a large number of companes wth debt rato approachng closely 33 percent n the low debt rato category. More mportantly, our approach n usng the medan (28.65%) s not aganst the CIFA gudelnes because the 33 percent debt rato s actually the maxmum level of debt that a company seekng Sharah status should use. The same ustfcaton s true for usng the medan value of ARTA rato. Ths study does not use the mpure plus non-operatng nterest ncome to revenue rato of 5 percent or more due to naccessblty of the data. The man reason s because the changes n fnancal statement format n Malaysa. Startng from the year 2005, as Malaysa Accountng 196

8 Standard Board (MASB) follows the Internatonal Reportng Standard Board (IRSB), there are few changes n fnancal statement presentaton (FRS 1). These changes among others combne the non-operatng ncome nformaton together wth the operatng ncome. As ths study extracts the fnancal data of IPO ssued from 1999 to 2008, the rato on mpure plus nonoperatng nterest ncome to revenue rato need to be excluded due to unavalablty of the data for the year 2005 onwards. However, by usng the SAC lst of approved securtes, the samples that are used n ths study already screened for nterest ncome to revenue rato. Therefore, Sharah extensveness screenng process suggested by ths study ndrectly used the three types of fnancal rato as suggested by Fqh Councl. Fgure 1 llustrates the constructon of these sub-samples. Ths method helps the study to form four types of Sharah extensveness quadrants known as quadrant A, B, C, and D. The level of debt over total asset and the level of the account recevable over total asset are the bass that are used to form the four types of Sharah extensveness quadrants. Based on the above quadrant, the Sharah-complant extensveness level are ranked from one wth the most extensveness to the least extensveness, whereby the hghest rankng are represent by the IPOs n C quadrant, followed by the IPOs n D quadrant, then IPOs n A quadrant. The IPOs n B quadrant represents the new ssues that have the lowest level of Sharah-complant. Through Fgure 2 below, the study arrange the quadrant wth the hghest level of Sharah-complant extensveness on the top of pyramd dagram followed by the lesser Sharah-complant extensve quadrant. C D A B Fgure 2: Pyramd Dagram of Sharah-complant Extensveness Bascally lower debt rato portrays that the IPO have a hgher level of extensveness. Ths means that the lower the use of debt by the company s pror to lstng, the lower the uncertanty element (gharar) and the lower the company s nvolvement wth the non-permssble fnancal sources 197

9 (rba). For ARTA rato, a company s classfed as a company wth a hgh level of extensveness f t has a low level of ARTA rato. Ths s because the small proporton of account recevable over total asset amount represents a large amount of asset that the company surely own. Ths agan reduces the rsk of lqudty and uncertanty (gharar) for the nvestor as the ARTA rato express the asset that defntely n the company s hand. Therefore the IPOs n quadrant C are chosen as the most Sharah-complant IPOs as they have lower debt rato and lower ARTA rato. The opposte of ths s the IPOs under quadrant B whch have hgher level of debt rato and ARTA rato. Between the IPOs n quadrants D and A, the study classfes the IPOs n quadrant D as the companes that have a better rank of Sharahcomplant extensveness compared to IPOs n quadrant A. Ths s because n Islam, debt ssue s consdered as a serous topc n fqh whereby the rba element s mpermssble (haram) n any actvty. Therefore, the IPOs wth low level of debt rato and hgh level of ARTA rato n quadrant D s rank as IPOs wth a better poston compared to the IPOs n quadrant A that have a hgh level of debt rato but a low level of ARTA rato. To evaluate the assocaton between underprcng and the extensveness of Sharah-complance, the study ntroduces three dummy varables (DEXT) as follows; DEXTA = a dummy varable that takes a value of 1 f the Sharah IPO s n quadrant A and 0 otherwse = 1 Quadrant A DEXTA 0 Otherwse DEXTB = a dummy varable that takes a value of 1 f the Sharah IPO s n quadrant B and 0 otherwse = DEXTB 1 Quadrant B 0 Otherwse DEXTC = a dummy varable that takes a value of 1 f the Sharah IPO s n quadrant C and 0 otherwse = DEXTC 1 Quadrant C 0 Otherwse Summary of Fndngs Profles of IPOs by Quadrants of Sharah Extensveness. Table 2 focuses on the profles of IPOs for each quadrants of Sharah extensveness that s represented by quadrant A, B, C and D. Based on the average results, the study fnds that the offer prces of quadrants C and D are set lower than the other Sharah extensveness quadrants. Ths table also ndcates that the average openng and closng prces for quadrant C and D are also lower as compared to quadrants A and B. In term of demand, quadrant C s oversubscrbed by tmes and ths shows that the demand for the IPOs under these quadrants s hgher compared to the remanng quadrants. The IPOs under quadrant C also ndcates that t has hgher percentage of reputable underwrters (55.56%). Ths means that ts lstng processes are conducted by more reputable underwrters compared to the other quadrants. In terms of offer sze, quadrant A records the greatest amount of offer sze (RM89,966,094.29), whle quadrant D ndcates the smallest average of offer sze (RM20,258,413.78). 198

10 Table 2 also reports the fnancal strengths of each quadrant based on the average values of fnancal data such as account recevables, total asset, total debt, and earnngs. In general, quadrant C reports the lowest average value of accounts recevable whch s opposte to quadrant B whch reports sx tmes larger than quadrant C. The other average values correctly reflect the specfc crtera that are used to rank the IPOs based on ther Sharah extensveness quadrants. For nstance, quadrant C, whch s supposed to represent the hghest level of Sharah extensveness, has a very low ARTA rato (4.48%) and debt rato (15.43%). It s then followed by quadrant D that conssts of IPOs wth hgh ARTA rato (24.82%) but wth lower debt rato (20.60%). Then, the thrd rank s quadrant A wth hgh debt rato (64.02%) but lower ARTA (7.59%). Lastly, quadrant B as the least Sharah extensveness quadrant possesses the characterstcs of hgh debt rato wth hgh ARTA rato. The IPOs under ths quadrant, on average reports a debt rato of percent and an ARTA rato of percent. Based on the average value of total assets, the study fnds that IPOs n quadrant A on average conssts of larger companes as compared to quadrant B, C and D. In terms of earnngs pror to lstngs, IPOs n quadrant A also ndcate the hghest earnngs. In general, the IPOs under quadrant C tend to be relatvely younger companes than those IPOs under quadrant A, whch are slghtly more experenced companes. Items Table 2: Profles of IPOs by Quadrants of Sharah Extensveness from Quadrants c A (n=76) 199 B (n=97) C (n=99) D (n=75) Offer Prce(RM) a Openng Prce (RM) Closng Prce (RM) Over-Subscrpton (tmes) IPOs wth Reputable Underwrter 51.32% 48.45% 55.56% 52% Offer Sze (RM 000) Accounts Recevable (RM'000) ARTA (%) Total Asset (RM'000) Debt (RM'000) Debt rato (%) Average EBITDA b (RM'000) Average PAT (RM'000) Frm's Age (Year) Top 5 Ownershp (%) Proceeds for Growth (RM'000) Total Proceeds (RM'000) Growth to Proceeds (%) Notes: a The weghted average offer prce bascally the total proceeds dvde wth total unts ssued. b The average values are calculated over three years perod pror to lstng. c A, B, C and D represent Sharah extensveness quadrants. The top rank s quadrant C wth low ARTA and debt rato, second rank s quadrant D wth hgh ARTA but low debt rato, thrd rank s quadrant A wth low ARTA but hgh debt rato, and the lowest rank s quadrant B, wth hgh ARTA and debt rato. Ths s based on average age of quadrant C whch s 3.47 years as compared to quadrant A whch s 6.17 years. The ownershp structure for all quadrants s more or less smlar. The hghest average amount of proceeds used for growth purposes s recorded by quadrant C. Therefore, as expected, the rato of growth to proceeds s also the hghest as t reaches 76.87

11 percent out of total proceeds. Ths value s hghest compared to quadrants A, B and D that report 46.34, and percent of growth to proceed ratos, respectvely. Results of Multple Regressons Ths study conducts the cross-sectonal multple regresson analyses to test hypotheses. Bascally, ths study has found that the varance nflaton factors (VIF) range for all the regresson analyses do not exceed 10 ponts. Therefore, the results are free from the serous ssue of multcollnearty (Klenbaum et al., 1998). The results are more relable wth the use of Breusch-Godfrey Lagrange Multpler statstcs test that helps to dentfy autocorrelaton and heterokedastcty problems n each model. Any of the regresson analyss results wth sgnfcant exstence of autocorrelaton and heterokedastcty ssues, are treated wth Newey West covarance estmator. Therefore, the results are more precse n estmatng the coeffcent covarance n the presence of heterokedastcty and autocorrelaton of unknown form. Table 3: Multple regresson result analyss on Sharah IPOs Panel Sharah Sample IPORTN S α β1alloct β GROTOPROCE EDS 2 β LNRISK EBITDA 3 β CV 1, ε (1) Varable Coeffcent t-statstcs IPORTN OPEN IPORTN CLOSE IPORTN OPEN# IPORTN CLOSE# ALLOCT *** *** GROTOPROCEEDS LNRISKEBITDA CONTROL VARIABLES (CV) LNOFFERSIZE ** LNAGE ** LNTA OWNERFIVE ** ** DWRITER DMKT INTERCEPT *** 2.667*** Adusted R-Squared F-Statstcs 7.626*** 5.862*** F-Statstcs Probablty Durbn-Watson stat VIF range Notes: Autocorrelaton and heteroskedastcty n the analyss are dentfed through Breusch-Godfrey Langrange multpler test and corrected wth Newey-West covarance estmator. The adusted values are hghlghted by symbol #. The symbols ***, **, * denote sgnfcance at the 1%, 5% and 10% levels respectvely. 200

12 The Impact of Sharah Extensveness Quadrants on the Factors that Influence the Intal Performance of IPOs The constructon of Sharah-complant extensveness quadrants has segregated the 347 IPO ssues nto four quadrants (A, B, C and D). The hypothess s bascally to dscover whether the factors that nfluence the ntal returns of each quadrant mght be dfferent. Panel A of Table 4 descrbes the results for quadrant A. The regresson results derved from Equaton (1a) show that IPORTN OPEN of quadrant A are nfluenced by ALLOCT and DWRITER. Meanwhle for IPORTN CLOSE, the varables are ALLOCT, and DMKT. Through Panel B of Table 4, the results for the least extensve IPOs represented by quadrant B suggest that ALLOCT, OWNERFIVE and DMKT are varables that nfluence IPORTN OPEN, whle IPORTN CLOSE are nfluenced by varables of ALLOCT, GROTOPROCEEDS, LNTA and OWNERFIVE. Next, the regresson results from Panel C of Table 4 presents the determnant factors that explan the ntal returns for quadrant C. The study fnds that IPORTNOPEN s sgnfcantly nfluenced by ALLOCT, LNOFFERSIZE and LNAGE, whle IPORTN CLOSE s nfluenced by ALLOCT. Lastly, Panel D of Table 4 llustrates quadrant D regresson results. The results ndcate that ALLOCT and LNRISKEBITDA are the two determnant factors that explan the IPORTN OPEN whle, IPORTN CLOSE s only nfluenced by ALLOCT. Table 4: Regresson Analyss on Sharah Extensveness Quadrants Panel A : Quadrant A IPORTN α β ALLOCT β 2 3 β CV 1 QA GROTOPROCE EDS β LNRISK EBITDA, ε 1 (2a) Varable Coeffcent t-statstcs IPORTN OPEN IPORTN CLOSE IPORTN OPEN IPORTN CLOSE ALLOCT *** *** GROTOPROCEEDS LNRISKEBITDA CONTROL VARIABLES (CV) LNOFFERSIZE LNAGE LNTA OWNERFIVE DWRITER * DMKT ** INTERCEPT Adusted R-Squared F-Statstcs 6.085*** 4.922*** F-Statstcs Probablty Durbn-Watson stat VIF range

13 Panel B: Quadrant B IPORTN α β ALLOCT β 2 3 β CV 1 QB GROTOPROCE EDS β LNRISK EBITDA, ε 1 (2b) Varable Coeffcent t-statstcs IPORTN OPEN IPORTN CLOSE IPORTN OPEN IPORTN CLOSE # ALLOCT * ** GROTOPROCEEDS ** LNRISKEBITDA CONTROL VARIABLES (CV) LNOFFERSIZE LNAGE LNTA ** OWNERFIVE ** * DWRITER DMKT * INTERCEPT Adusted R-Squared F-Statstcs *** F-Statstcs Probablty Durbn-Watson stat VIF range Panel C : Quadrant C IPORTN α β ALLOCT β 2 3 β CV 1 QC GROTOPROCE EDS β LNRISK EBITDA, ε 1 (2a) Varable Coeffcent t-statstcs IPORTN OPEN IPORTN CLOSE IPORTN OPEN # IPORTN CLOSE ALLOCT ** * GROTOPROCEEDS LNRISKEBITDA CONTROL VARIABLES (CV) LNOFFERSIZE ** LNAGE * LNTA OWNERFIVE DWRITER DMKT INTERCEPT *** 2.208** Adusted R-Squared F-Statstcs 3.133*** F-Statstcs Probablty Durbn-Watson stat VIF range

14 Panel D : Quadrant D IPORTN α β ALLOCT β 2 3 β CV 1 QD GROTOPROCE EDS β LNRISK EBITDA, ε 1 (2a) Varable Coeffcent t-statstcs IPORTN OPEN IPORTN CLOSE IPORTN OPEN # IPORTN CLOSE ALLOCT *** *** GROTOPROCEEDS LNRISKEBITDA ** CONTROL VARIABLES (CV) LNOFFERSIZE LNAGE LNTA OWNERFIVE DWRITER DMKT INTERCEPT Adusted R-Squared F-Statstcs 3.385*** 2.234** F-Statstcs Probablty Durbn-Watson stat VIF range Notes: Autocorrelaton and heteroskedastcty n the analyss are dentfed through Breusch-Godfrey Lagrange multpler test and corrected wth Newey-West Covarance estmator. The adusted values are hghlghted by symbol #. The symbol *, ** and *** denote sgnfcance at 10 percent, 5 percent, and 1 percent level respectvely. In term of the adusted R-squared values for each quadrant, the study fnds that quadrant A has the most of ts varance n ntal returns (37.90 %) explaned by the determnant varables, followed by quadrant D wth percent, quadrant C wth percent and lastly quadrant B wth only 5.71 percent. The study concludes that each of the quadrants has a dfferent set of varables that sgnfcantly nfluence the ntal returns. Each measure of ntal returns also ndcates that t s bascally affected by dfferent types of determnant varables. Obvously, t s only ALLOCT that sgnfcantly has shown as the common determnant factor of the ntal returns or underprcng of IPOs for all the quadrants. Overall, the results of these analyses lead to the reecton of the hypothess whch proposes that the dfferent sub-samples wth dfferent extensvenesss of Sharah complance (as ndcated by the four quadrants) have the same determnant factors that nfluence the ntal returns of IPOs. Concluson Remarks The man motvaton for the present study to examne the ntal performance of Sharah IPOs s that despte the emphass and mportance gven on attanng the status of Sharah complance and despte the clams that Sharah nvestment should perform better than those nvestments that do not comply to Sharah crtera, Sharah nvestment n general and IPOs n specfc stll fal to show any sgnfcance dfference n term of ther performance as compared to nvestment 203

15 n non-sharah equtes. Ths can be obvously wtnessed through the fnancal performance of MyETF Dow ones Islamc Market Malaysan Ttan 25 n Although the portfolos consst of publc lsted companes wth Sharah-complant status, the performance tumbled down durng the year t was launched. Whle the exstng emprcal studes on Sharah IPOs are stll lackng, those by Abdul Rahm and Yong (2008 & 2010) bascally leave the questons on the seemngly smlar performance between the Sharah and non-sharah IPOs remaned unanswered. The present study addresses the puzzle by examnng two possble explanatons, frstly the characterstcs of the two groups of IPOs and secondly the nadequacy of the exstng screenng crtera of Sharah equtes ncludng IPOs. Based on the nternatonal standard, by undergong all the relevant processes and consstent montorng, Sharah equtes are expected to outperform ther conventonal counterparts. Ths expectaton somehow ncreases the nvestors trust especally nsttutonal nvestors that requre a lot of Sharah equtes for ther portfolos. Hence, n Malaysa t s understandable why almost 89 percent of shares traded n the equtes market seek and possess the Sharah-complant status. However, n realty, the rsng trend of equtes wth Sharah-complant status does not seem to contrbute to an ncrease n performance. Ths mples that, the pre-revson screenng status before revsed SAC Sharah screenng n 2013 faled to dfferentate the performance of Sharah from the non-sharah IPOs. Ths study produces the second evdence after Abdul Rahm and Yong (2008 & 2010) that there s no statstcal dfference n term of performance by comparng the non-sharah IPOs wth the Sharah IPOs n general and wth a matched sample Sharah IPOs. Ths fndng mples that the pre-revson screenng crtera adopted by SAC may need to be modfed to nclude debt rato and ARTA rato n order to dfferentate the Sharah IPOs from ther conventonal counterparts. Even though the proposed, more strngent screenng crtera mght defer frms ablty to comply wth and obtan the Sharah-complant status, there are several advantages that can potentally be benefted from t. One of them s that when the Malaysan IPOs (and equtes n general) are screened based on the nternatonal standards e.g. Accountng and Audtng Organzaton for Islamc Fnancal Insttuton (AAOIFI), they can more easly gan the trust from the nternatonal fund or portfolo managers. The trust brngs n foregn nvestment whch wll ncrease the lqudty for Sharah IPOs market. The mportance of the fnancal ratos partcularly debt and ARTA ratos n selectng Sharah nvestment mples that the Malaysan regulators and polcy makers must come up wth a soluton to address ths ssue. The fndngs of the study show the mportance of adoptng strcter Sharah screenng methodologes n Malaysan IPOs. An advantage of the proposed screenng methodology s t helps to tackle the ssues of gharar or uncertanty factor and lqudty rsk as dscussed by fqh scholars. Any mprovement n the exstng practces s expected to boost back the Malaysan equtes market partcularly the Malaysan Sharah IPOs segment that had experenced slow performance after the Asan fnancal crss n 1997/1998 and Global fnancal crss n Complyng wth Sharah rules s the man motvaton Muslm nvestors choose to nvest n Sharah-complant IPOs. When prompted wth Sharah-complant IPOs n specfc, of most mportant are the nvestors perceptons that these assets are free from all the prohbted elements ncludng gharar, rba and forbdden sector by Islam. The fact that debt usage and accounts recevable are ndefntely tolerated can potentally contrbute to these elements partcularly the rskness of the nvestment suggest that havng these fnancal ratos 204

16 ncorporated n the screenng practce wll mprove the qualty of Sharah IPOs toward beng an nvestment that s more consstent wth the requrement of Islamc rules. In addton, the results whch show that the most conservatve Sharah IPOs group (represented by quadrant C) offers the hghest ntal returns mply that there are at least two ways n whch the nvestors can beneft from an nvestment n these assets. Frst and foremost s the qualty of these IPOs whch are more consstent wth the Sharah requrement. Second, the nvestors could enoy a hgh returns despte the lower fnancal rsks whch results from the ssung companes employng lower debt level and less accounts recevable per dollar of ther assets. Acknowledgements Ths paper s part of a research proect on Envronmental, Socal and Sharah Governance (ESSG) of Malaysan Sharah Complant IPOs sponsored by the Mnstry of Hgher Educaton under the Fundamental Research Grant Scheme [FRGS/1/2014/SS05/UNISZA/02/1]. References Abdul Rahm, R. & Yong, O. (2008). Intal returns of Sharah-complant IPOs n Malaysa. Captal Markets Revew, 16(2), Abdul Rahm, R. & Yong, O. (2010). Intal returns of Malaysan IPOs and Sharah-complant status. ournal of Islamc Accountng and Busness Research, 1(1), Bursa Malaysa webste http: Klenbaum, D. G., Kupper, L.L., Muller, K.E., and Nzam, A. (1998). Appled Regresson Analyss and Other Multvarable Methods. Duxbury Press. Belmont, CA. Mohamad Akram, L. (2006). Sharah approved securtes screenng process n Malaysa. Retreved from ISRA.com.my. [20 anuary 2010] Naughton, S. & Naughton, T. (2000). Relgon, ethcs and stock tradng: The case of Islamc equtes market. ournal of Busness Ethcs, 23, Securtes Commsson webste. Http: Yong, O. (2007b). Investor demand, sze effect and performance of Malaysan ntal publc offerngs: Evdence from post-1997 fnancal crss. urnal Pengurusan, 26,