Underpricing, board structure, and ownership: An empirical examination of Indonesian IPO firms

The purpose of this paper is to examine whether and how underpricing is associated with board structure and corporate ownership among firms conducting initial public offerings (IPOs) in the Indonesian equity market.

To capture the most recent development, the sample comprises 101 firms conducting IPOs in Indonesia's primary equity market in the period of 2003‐2011. The explanatory variables consist of board size, board independence, ownership concentration, and institutional ownership. In further analysis, the authors perform regressions considering three types of the controlling shareholder, namely families, foreign entities, and the government.

Providing some support for signaling theory, it is found that board independence is positively related to the level of underpricing. Further, this study provides evidence that the level of underpricing is negatively associated with both board size and institutional ownership, indicating that these two governance mechanisms play important roles in mitigating information asymmetry between the issuer and potential investors. Ownership concentration is insignificant in explaining the first‐day returns. When the type of corporate control is taken into account, it is revealed that government‐controlled companies tend to experience higher underpricing.

This paper contributes to the IPO underpricing literature since the influence of corporate governance mechanisms on initial returns is relatively under‐researched, particularly within the context of emerging markets.