Sectoral herding behavior in the aftermarket of Malaysian IPOs

Abstract

The Malaysian initial public offering (IPO) market is characterized by substantial uncertainties due to limited disclosure of information, ‘fixed-price pricing mechanism’, and cognitive biases of Asian investors. Together, these characteristics might induce investors to engage in herding behavior in the aftermarket of an IPO. This study investigates investors' herding behavior in the IPO aftermarket from 2001 to 2011 using Christie and Huang's [Christie, W. G., and R. D. Huang. 1995. “Following the Pied Piper: Do Individual Returns Herd Around the Market?” Financial Analysts Journal 51 (4): 31–37] method. The findings of this study show that for non-private placements, a negative and insignificant β1 coefficient, as an indication of herding, is reported for Technology sector. The herding behavior that is only constrained to technological firms during down market may be due to the risky nature of the new issues in the down market, rather than the uninformed characteristic of the individual investors. The findings of this study also show that for the private placement category, negative and insignificant coefficients of β1 and β2 are reported for Consumer Product and Technology sectors, respectively. Since the negative coefficients are not limited to the down market, with risky and uncertain shares, the results could be an indication of the herding of informed investors in the two mentioned sectors.

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