DLSU Business & Economics Review Volume 29(1) 2019, pp. 200-206

RESEARCH ARTICLE

Long Term under Performance IPO and Financial Distress (Empirical Study of Indonesia Stock Exchange)

Dhaha Praviandi Kuantan Doctorate in Management, Bogor Agricultural University, Indonesia Email : [email protected]

Hermanto Siregar Rector of the Perbanas Institute

Solikin M Juhro Head of Bank Indonesia Institute

Abstract : Long term under performance behavior is an anomaly of (IPO). Various theories explain the anomalous behavior through several approaches of Information Asymmetry, Winner Curse, Traditional - Ibbotson, and Signaling Equilibrium Phenomenom and Withdrawn IPO (WIPO). There is empirical evidence, through this research, that the long term under performance of IPO in the Indonesian is influenced by fundamental factors (Enterprise Value) and financial distress factors (Z-Score). Meanwhile, the market factor represented by volatility and PER does not affect long term under performance of IPO. In the perspective of capital structures and agency models, company owners who know the company's future prospects are deteriorating would prefer to finance through the issuance of shares instead of adding . In this context, company owners apply risk-sharing with other . IPO can also be classified as an effort to sell , as the most common way used by companies to avoid bankruptcy.

Keyword: IPO Anomaly, Long term under performance, Financial Disterss

JEL Classifications: E2, G3, J2

INTRODUCTION and Signaling Equilibrium Phenomenom and A. Background of the problem Withdrawn IPO (WIPO). Initial Public Offering (IPO) is a source of The WIPO model by Sembel (1996) is the most corporate funding besides a credit and internal consistent model in explaining anomalies in the IPO financing. The studies of IPO show some anomalies market, specifically related to long-term in IPO such as underpriced, long term performance. In the WIPO model, IPO stock runs underperformance, and "Hot" and "Cold" market underperform of the average stokes of other behavior. Theory that explains the anomaly behavior companies in the long term. This is different with the through several approaches, namely Information underpricing theory that secondary market prices on Asymmetry, Winner Curse, Traditional - Ibbotson average reflect the overall value of information so that long-term performance should not be bad.

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However, the models describing an anomalous Loughran and Ritter (1995) stated that a IPO have not been explained in more depth, more recent study found worse long-term particularly related to the diosyncratic factors that performance become five years after the offer date. explain the long-term underperformance of the IPO. This poor long-term performance was also found in Departing from the research gap, this study will Finland Keloharju (1993), in England Levis, (1993), explain the relationship between fundamental in Brazil, Chile and Mexico, Aggarwal, et al, (1993). factors, sentiment, and financial distress on the long In a study conducted in Japan by Hwang and term underperformance of the IPO. Furthermore, this Jayaram (1992), no long-term performance was research will provide an explanation of the potential found to be poor for the IPO. for moral hazard and conflict of . Sembel (1996) stated that these conditions cause the long run, a positive Initial Return obtained I. Study of literature on underpricing, which is nullified because of losses :Stock Issuance experienced in the long run. In Sembel (1996), Myers and Majluf (1984), Krasker (1986), Long-term Performance consists of 551 companies Noe (1988), Korajczyk, et al. (1990c), and Lucas taken from 1979-1983. The Mean, Median ,and IR and McDonald (1990) examine the impact of stock Standard Deviation of 551 companies were observed issuance on stock prices. The study predicts the at 26.99%, 6.67%, and 63.22%. To observe the negative price effect of the stock issuance. This price Long-Term Performance, observations were made reduction will be even greater because of the for one year, three years, and five years, asymmetry of information and the stock issuance. respectively, after listing the first day. Lucas and McDonald (1990) also show that, on average, the stock issuance will be preceded by an Financial Distress abnormal increase of stock prices. Asquith, Gertner and Scharfstein (1994) stated Based on the Agency approach as Harris & that the structure of a company's debt and balance Raviv (1990a), Stulz (1990), Hirshleifer & Thakor sheet influences restructured company. One of the (1989), stock prices will go down in line with the most common methods adopted by companies in stock issuance (IPO). This is in line with the order to avoid companies is to sell assets. Asymmetric Info approach as Ross (1977), Myers & One of the indicators used in the measurement Majluf (1984), Krasker (1986), Korajczyk, et a1 is the Z-score. Z-score is a linear combination of (1990c), Noe (1988), Narayanan (1988), Poitevin four or five financial ratios weighted with certain (1989), Lucas & McDonald (1990) and the Control coefficients Altman's estimation results. Financial model approach as Harris & Raviv (1988), Stulz indicators used include: (1988). The stock price decreases as greater 1. The per Total Assets Asymmetric Info as Myers & Majluf (1984), indicator is used to measure liquid assets in Krasker (1986), Korajczyk, et al. (1990). The stock relation to the company's total size. price will also decrease if the IPO size gets bigger as 2. Retained Earnings per Total Assets are used Krasker (1986). to measure the company's profitability (earnings power). Anomaly IPO: Long Term Underperformance 3. Earnings Before Interest and Taxes per Söhnke M. Bartram, Leslie Djuranovik, and Total Assets are intended to measure Anthony Garratt (2018) try to explain anomalous operating efficiency. behavior in the foreign exchange market in a 4. Market indicator used Market Value of different way from the general method. The general Equity per Book Value of Total Liabilities. theory of anomaly in the for-ex market is explained 5. The last indicator is turnover, Sales per as part of risk compensation. However, according to Total Assets. Söhnke M. Bartram, Leslie Djuranovik, and To produce a coefficient, Altman conducted Anthony Garratt (2018), anomaly is more caused by a sample separation between the companies that had mispircing or forecast errors from analysts. The declared bankruptcy and survived. Furthermore, the samples were taken 76 currencies from January 1971 company was reclassified based on financial size to June 2018. and ratio. After the sample was classified, the Stern and Bornstein, (1985) stated that In coefficient was determined by the discriminant the United States, between 1922 IPO during the analysis method. Measurement with z-score method period 1975 to June 30, 1985, only 600 IPO (31%) was better than traditional ratio analysis. Beaver performed better than the Standard & Poor's 500 (1967) who found that some of these indicators can index. Ritter (1991) using data of 1975-1984, Ritter separate between failed and non-failed companies found that in the secondary market, IPO stock through univariate analysis and determining the performed poorly for three years. degree of importance of the profitability, liquidity,

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and solvency ratios. Meanwhile, the weighting Total between ratios also shows a high degree of Assets. subjectivity. Furthermore, the company is divided into 3 zones, namely "safe", "gray", and "distress" II. Hypothesis and Modeling based on the z-score. Based on pecking order theory, there is a company's This study used a bankruptcy model, preference for internal financing compared to Altman z-score, which has been adjusted for (stocks or bonds). As long as developing countries. The testing population management considers that in the future the included all companies that were established from company will benefit and there is an availability of 2005 to 2008. Companies that were established or internal funds, the financing option is internal. If listed on the exchange in 2006, 2007, and 2008 were internal funds are limited, the choice will be more excluded from the calculation. This restriction was favorable to debt. By this debt, the management intended to determine differences in company company's control position is still maintained. resilience in an intact period. The data used were By the development of theories that explain the annual end of period data obtained from Bloomberg. long-term under-performance of IPO shares, we Table 1.Z-Score Global Model and Emerging suspect that companies choose IPO, because Market Model management knows that the company's future Z-Score Z-Score Notes prospects are declining. This condition will be more Bankruptcy Bankruptcy  T1 beneficial if the company issues stock in the context Model: Model untuk :Worki of risk sharing. This is in line with agency based and negara ng asymetric information models. berkembang: Capital Therefore, we developed the following hypothesis: Z = 1.2T1 + Z = 6.56T1 + per  Hypothesis 1 : Cummulative abnormal 1.4T2 + 3.3T3 + 3.26T2 + 6.72T3 Total Return is explained by Financial Distress .6T4 + .999T5. + 1.05T4 Assets,  Hypothesis2 : Cummulative abnormal  T2: Return is explained by Fundamental Value Zones of Zones of Retain  Hypothesis3 : Cummulative abnormal Discrimination: Discrimination: ed Return is explained by Market Sentiment  Z > 2.99 -  Z > 2.6 - Earnin This study measures the long term “Safe” Zone “Safe” Zone gs per underperformance of IPO by using IPO data of  1.8 < Z <  < Z < 2. 6 - Total issuers of stock on the Indonesian Stock Exchange 2.99 -“Grey” “Grey” Zone Assets, since 2008-2018. In this case, there were 26 Issuers. Zone  Z < 1.1 -  T3: The measurement used the abnormal return  Z < 1.80 - “Distress” Earnin approach, with the following formula: “Distress” Zone gs 퐿푛(푃)푡 Zone Before 푅푖푡 = 퐿푛(푃)푡−1 Interes 퐿푛(퐽퐶퐼)푡 t and 퐸(푅푖푡 ) = 퐿푛(퐽퐶퐼)푡−1 Taxes 퐴푏푛표푟푚푎푙 푅푒푡푢푟푛 = 푅 − 퐸(푅 ) per 푖푡 푖푡 퐶푢푚푚푢푙푎푡푖푣푒 퐴푏푛표푟푚푎푙 푅푒푡푢푟푛 = 퐶퐴푅푖푡 Total 푛 Assets, = 퐴푅푖푡  T4: 푡 Market Furthermore, testing is done through panel data Value between CAR with fundamental variables of (Enterprise Value and Relative Value), market Equity variables (Volatility) and financial distress variables per (Z-Score). The panel data equation is as follows: Book 푌푖푡 = 훼 + 훼푖 + 훿푡 + 푋푖푡 훽 + 휀푖푡 Value of 퐶퐴푅푖푡 = 훼 + 훼푖 + 훿푡 + 푍푠푐표푟푒푖푡 훽 + 푉표푙푎푡푖푙푖푡푦푖푡 훽 Total + 푃퐸푅푖푡 훽 + 퐸푉푖푡 훽 + 휀푖푡 Liabili 퐶퐴푅푖푡 = 퐿표푛푔 푡푒푟푚 푢푛푑푒푟 푝푒푟푓표푟푚푎푐푒 퐼푃푂 ties, Long-term: 120 months  T5: Sales per III. Result

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The estimation results of the model show not explain cumulative abnormal returns. This is that Z-SCore and Fundamental Factor which is seen in the table as follows: measured by enterprise value can explain Cummulative Abnormal Return. Meanwhile, the Table 2.The Cumulative Abnormal Return Panel relative value explained through the PE Ratio and Model the sentiment factor represented by Volatility does Dependent Variable: Cummulative Abnormal Return

Variable Coefficient Std. Error t-Statistic Prob.

ALTMAN_Z_SCORE 14.25039 5.417648 2.630365 0.0086 * CURR_ENTP_VAL 0.000218 5.26E-06 41.43867 0.0000* PE_RATIO -0.080777 0.202042 -0.399803 0.6893 VOLATILITY_30D -1.733697 1.211646 -1.430861 0.1526 C 110.4513 964.3500 0.114534 0.9088

know that there is a prospect of a fundamental Thus, the Financial Distress can explain the decline in company performance. cumulative behavior of abnormal returns in the long run which decreases (long term under performance) Conclusion of the stock. In the perspective of capital structure  There is empirical evidence, through this theory, the choice of management to conduct research, that the long-term underperformance financing through an IPO is a rational choice as part of IPO in the Indonesian stock market is of risk sharing with new investors. influenced by fundamental factors (Enterprise From the asymmetric information point of Value) and financial distress factors (Z-Score). view, the new did not know the company's Meanwhile, the market factor represented by long-term prospect information at the initial IPO. At volatility and PER does not affect long term the beginning of the IPO, on average stocks under performance in the IPO. experienced an abnormal return which is driven by  There is a potential moral hazard between optimism from new investors. Sembel (1996) stated management and old investors and new that the abnormal return is caused by excess investors at the IPO in which the management demand. takes the company's financing policy through an In the long run, the cumulative abnormal IPO compared to internal funds, debt, and return continues to fade and cause another anomaly, credit, because it sees the company's namely long term under performance. This underlies fundamental potential to decline towards the management and old investors to prefer IPO financial distress. (stocks) than internal cheaper funds or debt. From a  Moral hazard occurs, because management control point of view, if the company is good, the utilizes excess demand which has the potential owner will not be able to easily release his stock or to produce abnormal returns in the short term. reduce his control ability. Excess demand that occurs can also be caused This is also proven by Hypotheses 2 and 3 by a prospectus that is less comprehensive or in which the cummulative abnormal return decrease does not reveal the actual risk. is in line with the role of declining fundamental performance (enterprise value). Meanwhile, the Managerial Implication fundamental-market factors that are proxy with  Investors should pay attention in investing at relative PER and volatility actually show IPO stocks. Long-term investors must choose insignificant influence. This proves that there is a stocks that have strong fundamentals and strong potential for moral hazard, where management who long-term business prospects. should have more accurate information related to  OJK and IDX must enforce the code of conduct enterprise value both at the time of the IPO and in related to information disclosure to keep the the future, will tend to conduct an IPO when they market mechanism running well. 

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APPENDIXES Common Effect Model (CEM) atau Pooled Least Square (PLS)

Variable Coefficient Std. Error t-Statistic Prob.

ALTMAN_Z_SCORE 55.39062 10.65934 5.196439 0.0000 CURR_ENTP_VAL 0.000188 5.94E-06 31.72829 0.0000 PE_RATIO -0.921680 0.388348 -2.373334 0.0177 VOLATILITY_30D -0.720176 2.769577 -0.260031 0.7949 C 216.6394 168.2782 1.287389 0.1980

Prob(F-statistic) 0.000000

Based on Table 1, it is obtained a significance value of 0,000 which is smaller than 0.05. Thus, it can be said that the regression model is significant to predict IPO. In other words, the Common Effect Model or Pooled Least Square (PLS) regression model can be used. Fixed Effect Model (FEM)

Variable Coefficient Std. Error t-Statistic Prob.

ALTMAN_Z_SCORE 14.14215 5.419874 2.609312 0.0091 CURR_ENTP_VAL 0.000218 5.27E-06 41.37530 0.0000 PE_RATIO -0.078802 0.202130 -0.389858 0.6967 VOLATILITY_30D -1.734008 1.211780 -1.430959 0.1525 C 109.3116 81.03796 1.348894 0.1775

Effects Specification

Cross-section fixed (dummy variables)

Prob(F-statistic) 0.000000

Based on Table 2, it is obtained a significance value of 0,000 which is smaller than 0.05. Thus, it can be said that the Fixed Effect Model (FEM) regression model is significant in predicting IPO. Random Effect Model (REM)

Variable Coefficient Std. Error t-Statistic Prob.

ALTMAN_Z_SCORE 14.25039 5.417648 2.630365 0.0086 CURR_ENTP_VAL 0.000218 5.26E-06 41.43867 0.0000 PE_RATIO -0.080777 0.202042 -0.399803 0.6893 VOLATILITY_30D -1.733697 1.211646 -1.430861 0.1526 C 110.4513 964.3500 0.114534 0.9088

Effects Specification S.D. Rho

Cross-section random 4899.870 0.8627 Idiosyncratic random 1954.391 0.1373

Weighted Statistics

R-squared 0.345990 Mean dependent var 64.05362 Adjusted R-squared 0.345227 S.D. dependent var 2414.085 S.E. of regression 1953.431 Sum squared resid 1.31E+10 F-statistic 453.2455 Durbin-Watson stat 0.079986

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Prob(F-statistic) 0.000000

Unweighted Statistics

R-squared 0.230859 Mean dependent var 1846.142 Sum squared resid 8.16E+10 Durbin-Watson stat 0.012814

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