Jurnal Ekonomi dan Bisnis, Volume 26 No. 2 Oktober 2023, 289 - 312

Journal homepage: www.ejournal.uksw.edu/jeb
ISSN 1979-6471 E-ISSN 2528-0147

Information asymmetry, corporate
underpricing: Evidence in Indonesia

governance,

and

IPO

Jeffrey Bastanta Pelawia*, Rizky Yusviento Pelawib
a

Faculty of Economics and Business, Universitas Brawijaya, Malang, Indonesia;
jbpelawi@student.ub.ac.id*
b
Faculty of Business, Universitas Multimedia Nusantara, Banten, Indonesia;
rizky.yusviento@dosen.umn.ac.id

ARTICLE INFO

ABSTRAK

Article History:
Received 09-20-2021
Revised 07-19-2023
Accepted 08-21-2023

Studi ini menganalisis hubungan antara asimetri informasi, tata
kelola perusahaan, dan underpricing IPO pada sampel pasar IPO
di Indonesia. Penelitian terdahulu tentang underpricing IPO telah
menunjukkan hasil yang beragam, sehingga terdapat beberapa
celah penelitian yang menarik untuk dieksplorasi, terutama dalam
konteks pasar Negara berkembang. Oleh karena itu, tujuan dari
penelitian ini adalah untuk mengkaji lebih lanjut apakah asimetri
informasi dan tata kelola perusahaan menjadi penyebab
underpricing IPO. Untuk mencapai tujuan, digunakan teknik
purposive dan diperoleh 318 sample IPO selama periode 2010
hingga 2020 di Bursa Efek Indonesia (BEI). Selanjutnya, di bangun
model regresi berganda dan diuji menggunakan perangkat lunak
EViews 9. Hasil penelitian menunjukkan bahwa reputasi
underwriter berpengaruh negatif terhadap underpricing IPO, yang
menunjukkan tingkat asimetri informasi yang tinggi di pasar IPO
Indonesia. Selanjutnya, bukti kami mengungkapkan bahwa ukuran
dewan dan ukuran karyawan memiliki pengaruh negatif dan
signifikan terhadap underpricing IPO. Sementara itu, kepemilikan
manajer dan keluarga menunjukkan hasil yang positif dan tidak
signifikan karena adanya efek piramida. Akhirnya, kami juga
menemukan bahwa penjamin emisi terkemuka mengenakan biaya
penjaminan emisi yang lebih tinggi dibandingkan yang lainnya.
Secara umum, penelitian kami menyarankan bahwa
mempekerjakan penjamin emisi terkemuka dan menerapkan praktik
tata kelola perusahaan yang baik dapat memitigasi underpricing
selama IPO.

Kata Kunci:
IPO underpricing,
asimetri informasi,
tata kelola perusahaan,
pasar berkembang, Indonesia
Keywords:
IPO underpricing,
information asymmetry,
corporate governance,
emerging markets, Indonesia

ABSTRACT
This paper analyzes the relationships between information
asymmetry, corporate governance, and IPO underpricing in the
Indonesian IPO market. Previous studies on underpricing IPO
have shown mixed results, offering several interesting research

*Corresponding Author

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gaps to explore, especially in emerging markets. Accordingly, the
purpose of the research is to examine further whether information
asymmetry and corporate governance are the causes of IPO
underpricing. A purposive technique is used, and 318 samples of
IPOs are selected from 2010 to 2020 on the Indonesian Stock
Exchange (IDX). Next, a multiple regression model is developed
and tested using the EViews 9 software. Our evidence shows that
underwriter reputation negatively affects IPO underpricing,
indicating a high level of information asymmetry in the Indonesian
IPO market. Further, our evidence reveals that board size and
number of employees negatively affect IPO underpricing.
Meanwhile, manager and family ownership exhibit insignificant
results due to the pyramidal ownership structure. Finally, we also
find that reputable underwriters charge higher underwriting fees
than non-reputable ones. In general, our study demonstrates that
hiring a reputable underwriter and implementing good corporate
governance practices can minimize underpricing during the IPO.

INTRODUCTION
Initial Public Offerings (IPOs) are an alternative method for firms to raise
capital, which is beneficial for business expansion and financing capital expenditures,
debt repayments, research and development (R&D), and working capital (Badru,
2021). Since issuers receive lower funding than the intrinsic value of their assets if the
offered share prices are too low (underpricing), they must ensure that the offered share
prices accurately reflect the actual values of their asset or future growth opportunities.
The literature suggests that IPO underpricing is caused by adverse selection
bias (Ritter & Welch, 2002) resulting from asymmetric information conditions
between issuers, issuing banks, and investors (Baron, 1982; Rock, 1986). In a similar
vein, Banerjee et al. (2011) document that a greater degree of information asymmetry
leads to higher IPOs underpricing in developing countries. Several studies predict a
positive relationship between underwriter ratings and IPO underpricing since investors
cannot observe managers' actions (Ammer & Ahmad-Zaluki, 2016; Chen et al., 2015;
Dimovski et al., 2011; Nielsson & Wójcik, 2016; Rumokoy et al., 2019). However,
using the winner's curse model (Rock, 1986), other studies have demonstrated that
underwriter reputation is negatively associated with IPO underpricing (Chemmanur &
Krishnan, 2012; Gusni et al., 2019; Kotlar et al., 2017; Tong & Ahmad, 2015;
Utamaningsih et al., 2013; Yan et al., 2019; Yuliani et al., 2019).
A recent study indicates that good corporate governance may reduce agency
conflict and information asymmetry, thus, minimizing IPO underpricing (Singh &
Maurya, 2018). Several theories can explain how corporate governance can affect
IPOs. Although each theory has a unique point of view on this issue, they all agree that
board activities affect firm performance (Albada & Yong, 2017). However, studies on
corporate governance and IPOs underpricing still yield mixed results. For example,
Gao & Hou (2019) reveal that board size negatively affects IPO underpricing.

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Meanwhile, Gusni et al. (2019) do not discover a significant relationship between
board size and IPO underpricing in Indonesia. Another study examines the effects of
family and managerial ownership on IPOs underpricing. Ammer & Ahmad-Zaluki
(2016) demonstrate that family and managerial ownerships reduce IPOs underpricing
in Bursa Malaysia. Meanwhile, Gusni et al. (2019) do not find a significant
relationship in Indonesia.
In addition, although IPO underpricing has been extensively studied, its main
drivers remain debatable (Albada & Yong, 2017). Further, Albada & Yong (2018)
argue that studies conducted in developed countries can be extended further in
emerging markets. IPO underpricing remains prevalent in the Indonesian capital
market. Our preliminary study indicates that IPOs on the Indonesian stock market have
been underpriced by an average of 39.65 percent over the last decade. Such conditions
imply that further studies on the relationship between corporate governance and IPO
underpricing remain necessary to investigate the drivers of IPO underpricing,
especially in the emerging market context.
In this paper, we employ Ritter & Welch's (2002) asymmetric information
model. This paper offers a scientific contribution by expanding the existing literature
in several ways. First, the existing literature suggests that hiring a reputable
underwriter can reduce IPO underpricing; however, the only proxy used is the
underwriter writing rating (e.g., Ammer & Ahmad-Zaluki, 2016; Chen et al., 2015;
Dimovski et al., 2011; Nielsson & Wójcik, 2016; Rumokoy et al., 2019). Meanwhile,
Reber & Vencappa (2016) argue that underwriter fees reflect the ex-ante uncertainty
surrounding the characteristics of the agreement, where costs will be higher for issuers
with less public information, such as less established and younger firms. In addition,
increasing promotion costs could also reduce adverse selection problems (Habib &
Ljungqvist, 2001). Accordingly, underwriters’ compensation is likely to be a function
of information costs and deal characteristics (Hughes, 1986). This paper examines the
effect of reputable underwriters on IPO underpricing as well as underwriting fees as
two deal characteristics.
Second, existing literature documents that corporate governance, such as board
size and ownership structure, affects firms' market capitalization (Ammer & AhmadZaluki, 2016; Gao & Hou, 2019; Gusni et al., 2019). Meanwhile, Nam & Nam (2004)
argue that employees might also play a pivotal role in corporate governance, which
affects firms' productivity and profitability (Børing, 2019; Doğan, 2013) and boosts
firm growth (Sahoo & Raj, 2022). In a similar vein, several authors point out that the
number of employees is a robust proxy for firm size (D’Souza et al., 2020; Popescu,
2019; Spallini et al., 2021). In other words, the number of employees arguably signals
firm quality that reduces information asymmetry and eventually underpricing (Habib
& Ljungqvist, 2001). Therefore, this paper examines the effect of corporate
governance on IPO underpricing by utilizing board size, ownership structure, and
number of employees as corporate governance proxies.

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Third, as suggested by Albada & Yong (2018), this paper was conducted in a
developing country setting to provide distinct market characteristics and additional
evidence regarding the driver factors that underlie IPO underpricing in developing
countries.

LITERATURE REVIEW
Signaling Theory, Information Asymmetry, Underwriter Reputation, and IPO
Underpricing
In situations involving information asymmetry, signals can be used to resolve
the asymmetry problem (Spence, 1973). During an IPO, issuing firms’ visibility
increases drastically due to the vast information made public. In this context, the media
plays an important role in conveying information to investors, who rely heavily on the
news as a source of information. Bajo & Raimondo (2017) argue that news released
close to an IPO can boost investor confidence and share demands, increasing
underpricing. Using over 2,800 IPOs in the United States and more than 27,000
newspaper articles, they demonstrate that positive news about issuers has a
significantly positive relationship with IPO underpricing; this effect is stronger when
the news is published closer to the IPO date or is reported by the leading media.
Prior studies on asymmetric information among underwriters, issuers, and
investors in the IPO underpricing context show mixed results. In this regard, scholars
offer several perspectives regarding information asymmetry in IPO underpricing.
Using the lens of agency theory, Baron (1982) explains that underwriters have more
information about the capital market than issuers; thus, they are hired to provide advice
and conduct underwriting and valuations on the shares offered. In this case, the value
of their services will increase if the issuers have highly uncertain market demands.
On the one hand, Baron (1982) argues that underwriters will set an offering
price below the issuers' intrinsic values to sell the shares offered. On the other hand,
Loughran & Ritter (2004) argue that issuers prefer underwriters with strong analytical
skills over those with a reputation for setting low prices. Such conditions indicate that
the underwriter's reputation contains agency problems. Since investors cannot observe
managers’ actions, Loughran & Ritter (2004) predict that underwriter ratings
positively affect IPOs underpricing. Several studies support this perspective and
concur that greater underwriter ratings lead to greater IPOs underpricing (Ammer &
Ahmad-Zaluki, 2016; Chen et al., 2015; Dimovski et al., 2011; Nielsson & Wójcik,
2016; Rumokoy et al., 2019; Yatim, 2011).
The winner’s curse model developed by Rock (1986) offers a different
perspective. In his model, Rock (1986) classifies investors into informed (II) and
uninformed investors (UI). He argues that II will outperform UI in assets allocation,
forcing UI to allocate their assets to less profitable stocks. Such conditions result in

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markets consisting only of II as UI will exit because their IPO transaction returns are
always negative. Since the demand is insufficient when firms engage IPOs if the
markets consist only of II, UI must earn at least a rate of return commensurate with the
break-even point to maintain its market participation (Rock, 1986). Accordingly, this
perspective implies that all IPOs are underpriced to compensate for UI participation.
In contrast, Beatty & Ritter (1986) argue that IPO underpricing is related to
pre-IPO uncertainty, with greater uncertainty causing greater expected underpricing.
In other words, investors demand a risk premium over the uncertainty risk of the IPOs.
More studies have shown that underwriting selection affects IPO underpricing (Carter
& Manaster, 1990; Megginson & Weiss, 1991). In this regard, reputable underwriters
are known for their expertise, connections, and 'reasonable price' offerings, which
reduce IPO risks. In the meantime, reputable underwriters must establish reasonable
IPO prices to maintain their excellent reputation and earn higher fees.
Since reputable underwriters are associated with lower IPO risk, the incentive
to obtain information will be lower, thereby reducing uninformed investors (Carter &
Manaster, 1990). In addition, reputable underwriters could reduce IPO underpricing
by minimizing the gap between offering and listing, selecting high-quality firms to
underwrite, and reducing information asymmetry between issuers and investors (Hu et
al., 2021). Several studies support a negative relationship between underwriter
reputation and IPO underpricing (Chemmanur & Krishnan, 2012; Gusni et al., 2019;
Kotlar et al., 2017; Tong & Ahmad, 2015; Utamaningsih et al., 2013; Wang & Yung,
2011; Yan et al., 2019; Yuliani et al., 2019). Thus, hiring a reputable underwriter is
likely to minimize IPO underpricing.
Based on the discussion above, the following hypothesis is proposed:
H1a: More (less) reputable underwriters are associated with lower (greater)
IPO underpricing.

Prior studies suggest that underwriters’ compensation is a function of
information costs and deal characteristics (Hughes, 1986), reflecting the ex-ante
uncertainty surrounding the deal attributes (Reber & Vencappa, 2016). In this regard,
Reber & Vencappa (2016) argue that underwriters are likely to charge higher fees to
less public-informed issuers, such as less established and young firms. Such conditions
indicate that underwriters’ compensation is a deal characteristic that reflects the deal’s
risk level, with higher compensation indicating the deal’s higher risk level.
However, as a competing perspective, the reputation premium hypothesis
(Simunic, 1980) argues that reputable underwriters tend to charge higher
compensation fees (Carter & Manaster, 1990; Chemmanur & Krishnan, 2012) to
reflect their high-quality services. In this regard, high-quality services refer to
underwriters’ ability to sell off IPO prices 'correctly,' thus, satisfying both issuers and

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investors (Beatty & Ritter, 1986). In addition, according to the winner’s curse model
(Habib & Ljungqvist, 2001), underwriters’ compensation is likely a function of
promotional cost to reduce asymmetric information and solve adverse selection
problems to minimize IPO underpricing. In other words, underwriter fees are
promotional costs paid by issuers to promote their firms through underwriters’
reputations. Thus, reputable underwriters are likely to charge higher fees.
Based on the discussion above, we propose the following hypothesis:
H1b: More (less) reputable underwriters are associated with higher (lower)
underwriting costs.

Corporate Governance and IPO Underpricing
Several studies demonstrate a positive relationship between corporate
governance and firm capitalization (Ammer & Ahmad-Zaluki, 2016; Gusni et al.,
2019). Meanwhile, other studies suggest that corporate governance is a function of
boards of directors, employees, and firm ownership (Gao & Hou, 2019). Such
conditions indicate that corporate governance, including boards of directors,
employees, and firm ownership, may also affect IPO capitalization. Boards of directors
affect firm performance through their actions and decisions that determine their firms’
actions (Albada & Yong, 2017). Several proxies, i.e., board size, board composition,
and leadership structure, would represent corporate governance (Katti & Phani, 2016).
Board size reflects the breadth of firms’ contracting environments (Booth &
Deli, 1996), which exhibit the ability to secure and extract critical resources
(Goodstein et al., 1994), such as external funding and leverage from the environment,
thus, affecting firm performance (Dalton et al., 1999). Accordingly, a large board size
would increase firm performance. Since each board member has expertise, a larger
board size could provide a vast array of skills to increase firm performance (Gusni et
al., 2019) and enable firms to improve their post-financial crisis performance
(Villanueva-Villar et al., 2016).
Larger boards affect firm performance by allocating tasks according to the
expertise of each board member (Gusni et al., 2019). Using 2012-2017 IPO data in the
Indonesian capital market, Irhamni (2021) reveals that board size as the proxy of
corporate governance and independent board members negatively correlates with IPO
underpricing. These findings suggest as a corporate governance proxy, board size
reduces information asymmetry. In high information asymmetry, larger boards may
positively signal to the market and reduce underpricing compensation needed by
issuers during IPOs. Therefore, a larger board size will reduce IPO underpricing.
Based on the discussion above, we predict the following hypothesis:
H2: Larger (smaller) board size is associated with lower (greater) IPO
underpricing.

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The agency theory suggests that managers with higher firm ownership are more
likely to undertake non-value-maximizing projects (Albada & Yong, 2017). Using
managerial ownership and CEO duality as proxies for corporate governance, Gao &
Hou (2019) examine the effect of corporate governance on Taiwanese hi-tech firms’
IPO underpricing in 2009-2011. In line with the signaling hypothesis, they find that
managerial ownership positively affects IPO underpricing. Meanwhile, Ammer &
Ahmad-Zaluki (2016) discover that family and managerial ownership negatively affect
IPO underpricing in Bursa Malaysia in 2002-2012. Further, Gusni et al. (2019) find
that family and managerial ownership do not affect IPO underpricing in Indonesia.
However, they only use a limited sample size, thus warranting further studies using a
larger sample size.
The agency theory also predicts that management ownership increases firm
value due to reduced agency costs. Consequently, conflicts of interest between
executives and outside shareholders are higher when executive shares decrease, which
reduces performance (Gao & Hou, 2019). Conversely, when executives retain equity,
they signal to outside investors that their firms are of high value (signaling hypothesis).
Therefore, stock retention signals firms’ optimal quality because founders know more
about their firms’ future cash flows. Lower agency costs motivate investors to pay
higher prices for IPO shares. Hence, retained ownership is a positive indicator of an
IPO firm’s value.
This line of argument motivates us to propose the following hypothesis:
H3: Higher (lower) managerial and family ownerships are associated with
greater (lower) IPO underpricing.

In the corporate governance context, we assume that the number of employees
may also correlate with IPO underpricing because number of employees affects firm
productivity (Børing, 2019). Further, Doğan (2013) documents that the number of
employees positively affects firm profitability. According to Kourtzidis et al. (2019),
the number of employees and total assets indicate firm size, where larger firms tend to
exhibit better performance. In other words, the number of employees signals issuers’
quality. Meanwhile, Nam & Nam (2004) argue that employees could also play a
pivotal role in corporate governance, which affects firms' productivity and profitability
(Børing, 2019; Doğan, 2013), and firms' growth (Sahoo & Raj, 2022). In a similar
vein, several authors point out that the number of employees is a robust proxy for firm
size (Kessler et al., 2020; Popescu, 2019; Spallini et al., 2021).
Based on the discussion above, the following hypothesis is proposed:
H4: A larger (smaller) number of employees is associated with lower (greater)
IPO underpricing.

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Figure 1 below illustrates our research framework representing the relationships
between IPO underpricing, information asymmetry, and corporate governance.

Figure 1
Research Framework

RESEARCH METHODS
Sample Construction
We use IPO data from 2010 to 2020 from the Indonesia Stock Exchange (IDX).
This study defines underpricing as a condition in which the first-day market price of a
stock is higher than the price offered to the public (Beatty & Ritter, 1986). In addition,
this study utilizes data from the Bloomberg’s Indonesia Capital Market report on the
Indonesia Equity & Rights Offering table. Our data is cross-sectional, with data
collection at a certain time (Cooper & Schindler, 2014). We generate our sample firms
using the purposive sampling method with the following criteria: a) firms conducting
IPOs on the Indonesia Stock Exchange (IDX) in 2010-2020; and b) the IPOs were
underpriced.
Variable Definition
We follow prior studies (Gao & Hou, 2019; Gusni et al., 2019; Huang et al.,
2019) in measuring the dependent variable. Specifically, we calculate IPO
underpricing as follows:
𝑈𝑃𝑖 =

(𝐶𝑃𝑖 − 𝑂𝑃𝑖 )
𝑂𝑃𝑖

..................................................................................................................................... 1

where CPi is the closing price on the first day for firm i, OPi is the bid price for firm
i, and UPi is the underpricing for firm i.

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We use reputable underwriter (dUNBR) to examine the relationship between
information asymmetry and underpricing. Reputable underwriters are frequently
associated with lower information asymmetry, better long-term performance, higher
analytical skills, and greater information ownership (Dong et al., 2011; Wang & Yung,
2011). Prior studies operationalize underwriter reputation with various measures,
including binary measurement and four-tier rank (Johnson & Miller, 1988), ten-tier
rank (Carter & Manaster, 1990), and relative market share rank (Megginson & Weiss,
1991). However, these measures are arguably less applicable for retail investors due
to data and calculation difficulties, necessitating media-related measure that is more
easily accessible by all IPO investors. Chen et al. (2014) demonstrate that underwriting
quality is positively related to underwriting market share. Further, Bajo & Raimondo
(2017) reveal that media affects underpricing. Thus, we measure dUNBR using the
Indonesia Capital Market from the Bloomberg business magazine's Indonesia Equity
& Rights Offering table. The dUNBR metric utilizes data from the previous year (t-1),
such as Bloomberg League Tables in 2009, to determine underwriter reputation in
2010, etc.
This study utilizes board size (BOD_SIZE), managerial and family ownership
(MFOWN), and number of employees (HR) as proxies for corporate governance to
investigate the relationship between corporate governance and underpricing.
Following Albada & Yong (2017); Gusni et al. (2019); Irhamni (2021), we
operationalize BOD_SIZE as the number of boards of commissioners plus the
company's board of directors in the IPO year.
Ammer & Ahmad-Zaluki (2016); Gao & Hou (2019); Gusni et al. (2019)
measure managerial ownership as the percentage of shares owned by the executive
directors during the IPO. Additionally, they measure family ownership as the
percentage of shares owned by the family of the board of directors during the IPO.
Accordingly, we measure MFOWN as the total percentage of shares owned by the
board of directors plus the percentage of shares owned by the family of the board of
directors during the IPO. First, we identify the individuals registered as owners and
board of director members. Second, we determine the number of shares owned by each
of these individuals. Finally, the number of shares owned by the family and the board
of directors is divided by the number of outstanding shares after the IPO. Greater
MFOWN indicates higher managerial and family ownership.
The number of employees (HR) is defined as the number of employees of a
firm during the IPO, including the board of directors, managers, staff, and contract
employees. This measurement follows (Børing, 2019; Doğan, 2013; Kourtzidis et al.,
2019) who discover the relationships between HR, firm performance, and profitability.
We also add several control variables for profitability (PROFIT), liquidity (LIQUID),
and firm age (AGE) during IPOs (Ammer & Ahmad-Zaluki, 2016; Chemmanur &
Yan, 2019; Chua, 2014; Colombo et al., 2019; Li et al., 2019; Wang et al., 2021).

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Table 1
Variable Definitions
Variables
Definition
UP
The difference between the closing price and the offer price divided by the bid
price during the IPO multiplied by 100.
dUNBR
A dummy of reputable underwriters based on Bloomberg business magazine’s
Indonesia Capital Market report, one if the underwriter is listed in the Bloomberg
League Tables, zero otherwise.
BOD_SIZE
The number of boards of commissioner and board of director members of a firm
during IPOs.
MFOWN
The total percentage of shares owned by the board of directors plus the percentage
of shares owned by the family of the board of directors during the IPO.
HR
Total employees owned by the firm during the IPO.
PROFIT
Firm profitability, measured using the company's earnings per share (EPS) during
the IPO.
LIQUID
Firm’s liquidity, measured using the Current Ratio (Current Assets / Current
Liquidity) during the IPO.
AGE
Firm’s age, measured by subtracting the IPO year with the firm’s establishment
year (based on the deed of establishment).
UN_FEE
Underwriter’s fees, including underwriting, management, and selling fees, are in
billions of Rupiah (IDR).
SIZE
Firm size, measured by total assets during the IPO.
Sources: Ammer & Ahmad-Zaluki (2016); Beatty & Ritter (1986); Chemmanur & Yan (2019); Chua
(2014); Colombo et al. (2019); Gao & Hou (2019); Gusni et al. (2019); Li et al. (2019); Rumokoy et
al. (2019); Wang et al. (2021); Yan et al. (2019)

We also examine the relationship between dUNBR and underwriter fees
(UN_FEE). According to Carter & Manaster (1990); Chemmanur & Krishnan (2012);
Habib & Ljungqvist (2001), reputable underwriters tend to charge higher fees. Thus,
underwriters must price IPOs fairly to maintain their reputation and receive higher
commissions. Thus, higher underwriter fees as promotion costs will reduce IPO risk
and serve as a signal for investors, reducing adverse selection problems and
underpricing. We measure UN_FEE as follows:
𝑈𝑁_𝐹𝐸𝐸 = 𝑈𝐹𝑖 + 𝑀𝐹𝑖 + 𝑆𝐹𝑖 .......................................................................................................... 2

where UFi is the underwriting fee, MFi is the management fee, and SFi is the selling
fee for firm i.

Model Specification
We test the hypotheses by constructing multiple regression models using
EViews 9 software, with UP as the dependent variable and UNBR, BOD_SIZE,
MFOWN, and HR as the independent variables. We also add PROFIT, LIQUID, and
AGE as the control variables that have been commonly used in prior IPO underpricing
studies (Ammer & Ahmad-Zaluki, 2016; Chemmanur & Yan, 2019; Chua, 2014;
Colombo et al., 2019; Li et al., 2019; Wang et al., 2021).
𝑈𝑃𝑖,𝑡 = 𝛽0 + 𝛽1 𝑑𝑈𝑁𝐵𝑅𝑖,𝑡 + 𝛽2 𝑃𝑅𝑂𝐹𝐼𝑇𝑖,𝑡 + 𝛽3 𝐿𝐼𝑄𝑈𝐼𝐷𝑖,𝑡 + 𝛽4 𝐴𝐺𝐸𝑖,𝑡 + 𝑒 .................................... 3

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𝑈𝑃𝑖,𝑡 = 𝛽0 + 𝛽1 𝐵𝑂𝐷𝑆𝐼𝑍𝐸 𝑖,𝑡 + 𝛽2 𝑀𝐹𝑂𝑊𝑁𝑖,𝑡 + 𝛽3 𝐻𝑅𝑖,𝑡 + 𝛽4 𝑃𝑅𝑂𝐹𝐼𝑇𝑖,𝑡 + 𝛽5 𝐿𝐼𝑄𝑈𝐼𝐷𝑖,𝑡 +
𝛽6 𝐿𝐸𝑉𝑖,𝑡 + 𝜀 .......................................................................................................................... 4
𝑈𝑃𝑖,𝑡 = 𝛽0 + 𝛽1 𝑑𝑈𝑁𝐵𝑅𝑖,𝑡 + 𝛽2 𝐵𝑂𝐷_𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝛽3 𝑀𝐹𝑂𝑊𝑁𝑖,𝑡 + 𝛽4 𝐻𝑅𝑖,𝑡 + 𝛽5 𝑃𝑅𝑂𝐹𝐼𝑇𝑖,𝑡 +
𝛽6 𝐿𝐼𝑄𝑈𝐼𝐷𝑖,𝑡 + 𝛽7 𝐿𝐸𝑉𝑖,𝑡 + 𝜀 .............................................................................................. 5

Equation 3 examines the effect of underwriter reputation on IPO underpricing,
while Equation 4 investigates the effect of corporate governance on IPO underpricing.
Meanwhile, equation 5 simultaneously measures the effects of underwriter reputation
and corporate governance on IPO underpricing. Further, to test the entrepreneur losses
model (Habib & Ljungqvist, 2001), we use dUNBR as the dependent variable, with
UN_FEE as the independent variable and SIZE as the control variable.
𝑑𝑈𝑁𝐵𝑅𝑖,𝑡 = 𝛽0 + 𝛽1 𝑈𝑁_𝐹𝐸𝐸𝑖,𝑡 + 𝛽2 𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝑒 ................................................................................ 6

RESULTS
Descriptive Statistics
Table 2 presents the descriptive statistics of IPO underpricing in Indonesia
between 2010 and 2020. Panel A displays an average IPO underpricing of 39.68
percent with a median of 49.52 percent, indicating that more than fifty percent of IPO
firms exhibit above-average underpricing. In other words, the level of underpricing is
significant. The standard deviation is 24.32 percent, ranging from 70 percent to 0.34
percent.
Panel A of Table 2 suggests that the average IPO underpricing in Indonesia is
greater than that of prior studies. For instance, the average underpricing is 21.03
percent in Global Markets (Li et al., 2016), 21.22 percent in Bursa Malaysia (Ammer
& Ahmad-Zaluki, 2016), 18.1 percent in the USA (Nielsson & Wójcik, 2016), 30.26
percent in Taiwan (Gao & Hou, 2019), and 32 percent in the Indonesia Stock Exchange
(IDX) in 2013 to 2017 (Gusni et al., 2019).
Panel B displays a year-by-year data description. The number of underpricing
IPOs has increased significantly in the last four years. Moreover, the level of
underpricing has dramatically increased since 2017. The greatest IPO underpricing is
in 2019, with a mean and standard deviation of 54.75 percent and 17.20 percent,
respectively.

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Table 2
The Descriptive Statistics of the IPO Underpricing
Panel A: Descriptive statistics of the underpricing of 318 Indonesian IPOs between 2010-2020
Jarque-Bera
Dependent
Std.
Mean
Median
Min
Max
Variable
Dev
z-value
p-value
UP
39.688
49.523
24.322
0.347
70.000
28.451
0.0001
Panel B: Distribution of UP by year
Year
n
Mean
Median
Std. Dev
2010
22
31.053
18.874
23.227
2011
17
20.137
11.111
20.335
2012
20
29.405
23.635
23.035
2013
21
24.308
13.043
23.368
2014
20
27.703
13.974
24.527
2015
14
29.813
19.970
25.533
2016
14
25.597
12.939
27.084
2017
34
45.250
50.000
25.733
2018
54
52.573
50.000
19.359
2019
51
54.755
50.000
17.201
2020
51
39.156
34.782
19.377
Source: Primary Data, Processed (2021)

Table 3 also presents the descriptive statistics of IPO samples. The table
indicates that the mean and standard deviation of the dummy underwriter variable are
0.53 and 0.49, respectively. The median value of 1 indicates that more than fifty
percent of IPOs in Indonesia use reputable underwriters on the Bloomberg League
Tables. The average total board of director members of IPO firms 7.01. PT Indofood
CBP Sukses Makmur Tbk and PT Mitrabahtera Segara Sejati Tbk have the greatest
number of directors (sixteen), while 34 firms have the lowest number of board
members (four).
The average value of the management and family ownership variables is 15.67
percent, with a maximum value of 98.94 percent by PT Sentra Food Indonesia Tbk.
PT Salim Ivomas Pratama Tbk has the largest number of employees, i.e., 31,162. The
average number of employees is 1,186.59, with a standard deviation of 2,874.89.
Meanwhile, the underwriter cost variable (UN_FEE) has an average of IDR 7.23
billion with a standard deviation of IDR 15.03 billion. PT Indofood CBP Sukses
Makmur Tbk has the highest underwriter cost of IDR 144.7 billion in 2010, with PT
Credit Suisse Securities Indonesia, PT Kim Eng Securities, PT Deutsche Securities,
and PT Mandiri Sekuritas as its lead underwriters. Meanwhile, the lowest underwriter
cost is IDR 0.225 billion by PT Sejahteraraya Anugrahjaya Tbk, with PT Evergreen
Capital as its lead underwriter.

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Table 3
Descriptive Statistics for 318 Indonesian IPOs between 2010 and 2020
Mean
Median
Std. Dev
Min
Max
dUNBR
0.534
1.000
0.499
0.000
1.000
BOD_SIZE
7.018
6.000
2.311
4.000
16.000
MFOWN
15.676
0.800
26.556
0.000
98.943
HR
1186.59
295
2874.89
7.000
31162
PROFIT
28.785
8.615
68.729
-33.122
577.768
LIQUID
2.051
1.238
3.337
0.056
34.66
AGE
17.855
14.512
13.746
0.528
64.865
UN_FEE
7.232
2.004
15.032
0.225
144.706
SIZE
1784.30
624.151
3801.61
9.796
32410.33
Source: Primary Data, Processed (2021)

Table 4 informs the Pearson correlation coefficients for our variables. The
underwriter dummy variable is significantly and positively correlated with board size
and number of employees. Nevertheless, it is negatively correlated with management
and family ownership. Hence, larger firms tend to use reputable underwriters, although
the decision is also influenced by management and family ownership because firms
with greater management and family ownership tend to reduce IPO costs. Lastly, the
underwriter variable is positively and significantly associated with underwriting fees.
Table 4
Correlation Coefficients between Variables
(2)
(3)
(4)
(5)
(6)

Variables
(1)
dUNBR (1)
1.00
BOD_SIZE (2) 0.29***
1.00
MFOWN (3)
-0.045
-0.10*
1.00
HR (4)
0.26*** 0.51***
-0.05
1.00
PROFIT (5)
0.19*** 0.33***
0.00 0.43***
1.00
LIQUID (6)
0.047 -0.10**
0.02 -0.10*
0.06
1.00
AGE (7)
0.029 0.22***
0.05 0.28*** 0.23***
-0.02
UN_FEE (8)
0.43*** 0.43*** -0.16*** 0.45*** 0.38***
-0.06
SIZE (9)
0.32*** 0.53*** -0.12** 0.58*** 0.39*** -0.22***
*, **, and *** denote the 10%, 5%, and 1% significance level, respectively.
Source: Primary Data, Processed (2021)

(7)

(8)

(9)

1.00
0.01
0.21***

1.00
0.58***

1.00

Determinants of IPO Underpricing
Model 1 of Table 5 shows that the underwriter reputation dummy variable
(dUNBR) is negatively related to IPO underpricing at a one percent significance level
(t = -4.196). The value of -11.021 explains that hiring a reputable underwriter will
reduce IPO underpricing by 11.021 percent, assuming other control variables are zero.
The F value is 9.444 and is significant at one percent. The R-squared value is 0.107,
explaining that corporate governance, with underwriter reputation as the proxy, and
other control variables simultaneously explain 10.7 percent of IPO underpricing on the
Indonesia Stock Exchange (IDX) in 2010-2020.
Model 2 of Table 5 indicates the relationship between board size, management
and family ownership, number of employees, and IPO underpricing. The F-value is
13.261, significant at one percent, while the R-squared value is 0.203. Board size

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Information asymmetry, corporate governance, and IPO (Pelawi, Pelawi)

(BOD_SIZE) and number of employees (HR) are negatively associated with IPO
underpricing at a significance level of one percent (-2.705 and -0.201). Further,
management and family ownership (MFOWN) have an insignificant relationship. The
PROFIT, LIQUID, and AGE control variables exhibit the same direction as Model 1,
although LIQUID and AGE are insignificant.
Table 5
Determinants of IPO Underpricing
Model 1
Model 2
Model 3
Information
Corporate
Expected
Asymmetry variables
Governance variables All variables
Sign
only
only
-11.021***
-5.569**
dUNBR
(-4.196)
(-2.130)
-2.705***
-2.447***
BOD_SIZE
(-4.402)
(-3.928)
0.056
0.054
MFOWN
+
(1.213)
(1.165)
-0.201***
-0.181***
HR
(-3.412)
(-3.051)
-0.050***
-0.032*
-0.030*
PROFIT
(-2.624)
(-1.787)
(-1.668)
0.773**
0.386
0.428
LIQUID
(1.98)
(1.031)
(1.147)
-0.174**
-0.049
-0.050
AGE
(-1.838)
(-0.538)
(-0.546)
48.552***
63.767***
64.336***
Constant
(18.229)
(14.202)
(14.384)
R-squared
0.107
0.203
0.215
F
9.444***
13.261***
12.145***
Std. Error
23.121
21.911
21.788
n
318
318
318
*, **, and *** denote the 10%, 5%, and 1% significance level, respectively. To avoid skewness,
the square root of HR is applied.
Source: Primary Data, Processed (2021)

We use dummy underwriter reputation (dUNBR), board size (BOD_SIZE),
management and family ownership (MFOWN), and number of employees (HR) to
investigate the effects of information asymmetry and corporate governance on IPO
underpricing (Model 3 in Table 5). The F-value is 12.145 and significant at the one
percent level, implying that underwriter reputation, board size, management and
family ownership, number of employees, and other control variables simultaneously
affect IPO underpricing. The largest Variance Inflation Factor (VIF) value is 1.399,
indicating no serious multicollinearity problem.
Model 3 in Table 5 shows that the dUNBR value is -5.569 and p-value as 0.034,
implying that reputable underwriters significantly and negatively affect IPO
underpricing. Thus, H1a is empirically supported. As the corporate governance
proxies, BOD_SIZE and HR have a p-value < 0.01, indicating board size and number
of employees significantly reduce IPO underpricing. Thus, H2 and H4 are also
empirically supported. Meanwhile, MFWON exhibits an insignificant relationship

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303

with IPO underpricing. Thus, H3 is not supported.
Determinant of Reputable Underwriter
Another hypothesis predicts a significant and positive relationship between
underwriter fees and underwriter reputation, assuming that underwriters will charge
higher fees because of their high reputation. Thus, issuers’ ability to hire reputable
underwriters will increase promotion costs and reduce information asymmetry and
IPO underpricing (Chemmanur & Krishnan, 2012; Habib & Ljungqvist, 2001). Table
6 presents the regression results between underwriter reputation (dUNBR) and
underwriter fees (UN_FEE) 6. We also add a control variable of firm size (SIZE),
measured with the issuer's total assets during IPOs.
Model 3 in Table 6 indicates that the UN_FEE variable positively and
significantly affects dUNBR, indicating that reputable underwriter services are IDR
0.005 billion more expensive than non-reputable ones. Thus, H1b is empirically
supported. In addition, the SIZE control variable also has a positive and significant
relationship with dUNBR. Interestingly, the presence of the control variable (Model 3
in Table 6) increases the R-squared by 2.4 percent compared to Model 1 in Table 6,
indicating that SIZE effectively explains the relationship between UN_FEE and
dUNBR.
Table 6
Determinants of Underwriter Reputation
(1)
(2)
(3)
UN_FEE
0.009***
0.005***
(5.114)
(2.971)
SIZE
0.103***
0.078***
(5.868)
(2.971)
Constant
0.468***
-2.264***
-1.638***
(15.639)
(-4.740)
(-3.169)
R-squared
0.076
0.098
0.122
F
26.163***
34.435***
22.060***
Std. Error
0.480
0.475
0.469
n
318
318
318
*, **, and *** denote the 10%, 5%, and 1% significance level, respectively.
Source: Primary Data, Processed (2021)

DISCUSSIONS
Our findings show that underwriter reputation significantly and negatively
affects IPO underpricing. In other words, issuing firms hire reputable underwriters to
give signals to the market, thereby reducing underpricing. This finding is consistent
with previous studies (Chemmanur & Krishnan, 2012; Dong et al., 2011; Gusni et al.,
2019; Kotlar et al., 2017; Tong & Ahmad, 2015; Utamaningsih et al., 2013; Wang &
Yung, 2011; Yan et al. 2019; Yuliani et al. 2019). However, our findings differ from
other studies (Ammer & Ahmad-Zaluki, 2016; Chen et al., 2015; Dimovski et al.,
2011; Nielsson & Wójcik, 2016; Rumokoy et al., 2019; Yatim, 2011) likely because
of different settings. Prior studies largely focus on developed countries that have

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Information asymmetry, corporate governance, and IPO (Pelawi, Pelawi)

efficient markets. Meanwhile, the Indonesian capital market arguably exhibits a
greater information asymmetry, as indicated by greater IPO underpricing, a common
phenomenon in countries with greater information asymmetry (Banerjee et al., 2011).
Overall, this test demonstrates that the Indonesian IPO market exhibits greater
information asymmetry, as evidenced by the importance of reputable underwriters
during IPOs. Therefore, increasing premarket transparency is crucial to reducing the
winner's curse for retail investors post-listing period (Ranganathan & Saraogi, 2021).
Board size negatively affects IPO underpricing, implying that issuing firms
with more board members exhibit lower IPO underpricing because a larger board size
improves managerial performance by having more diverse expertise (Gusni et al.,
2019). Thus, highly performing boards of directors will ensure firms’ long-term
growth, which provides a positive signal for IPO investors. Eventually, firms do not
have to offer more incentives for investors through underpricing (Gao & Hou, 2019).
We find that management and family ownership do not significantly affect IPO
underpricing. However, we document a positive direction, similar to Gusni et al.
(2019), who also reveal a positive and insignificant relationship between ownership
and IPO underpricing in Indonesia. A likely explanation for our finding is the unique
ownership structure, where issuing firms are not directly owned by families but
through their other firms or a pyramidal ownership structure (Lepetit et al., 2015).
Wang et al. (2015) argue that private owners essentially control many newly listed
firms through a complex pyramid ownership structure. We argue that issuing firms’
shares are owned by other firms as institutional bias, which results in bias. The
pyramidal ownership structure will make it difficult for IPO investors to detect the
actual percentage of management and family ownership. Therefore, stock retention is
less effective as a signaling mechanism to demonstrate optimal firm quality.
Our fourth hypothesis predicts that the number of employees negatively affects
IPO underpricing because it indicates firms’ productivity and profitability (Børing,
2019; Doğan, 2013; Kourtzidis et al., 2019). We find that HR negatively affects IPO
underpricing, implying that the number of employees signals issuers’ quality because
it mitigates information asymmetry and underpricing.
Reputable underwriters charge higher fees than non-reputable ones. This
finding explains that issuers need greater promotional costs to hire highly reputable.
However, increased promotion costs may offset the benefits of lower underpricing.
Thus, these findings support the Habib & Ljungqvist (2001) entrepreneurial loss
model. We also find that firm size is positively associated with reputable underwriters.
Therefore, issuers that hire reputable underwriters have greater total assets than their
peers, implying that issuers need greater financial capacity to hire reputable
underwriters during IPOs.

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305

CONCLUSIONS AND RECOMMENDATIONS
This study investigates the underpricing of the first day of IPOs in Indonesia
in 2010-2020. Our examination of 318 IPOs reveals an average underpricing of 39.68
percent. We hypothesize that information asymmetries and corporate governance
affect IPO underpricing.
We empirically find that underwriter reputation can reduce information
asymmetry, thereby minimizing IPO underpricing. Our findings contradict several
prior studies that find a positive relationship between underwriter reputation and IPO
underpricing, likely because of differences in research settings. Prior studies focus on
developed countries with much less prevalent information asymmetry than developing
countries. We also empirically demonstrate that corporate governance, such as board
size and number of employees, reduces IPO underpricing. However, managerial and
family ownerships do not affect IPO underpricing, likely because of Indonesian firms’
pyramidal ownership structure. In addition, our results support the entrepreneurial
losses model, where reputable underwriters charge higher fees. Hence, reputable
underwriters charge higher fees than non-reputable ones. In return, issuing firms that
hire their services will only exhibit lower IPO underpricing as incentives for investors.
Overall, our evidence suggests that underwriters’ reputation, board size, and
the number of employees are effective signaling mechanisms for investors.
Underwriters’ reputation is closely related to underwriting cost. Thus, hiring reputable
underwriters will signal investors about issuers’ quality. Additionally, board size and
number of employees indicate firm size, while larger firms arguably exhibit better
future profitability. Thus, managers can hire reputable underwriters, although the costs
are higher. Further, firms should consider their governance before making IPO
decisions because corporate governance sends a positive signal to investors during
IPOs. Better-governed issuing firms do not need to offer lower IPO prices to investors
to compensate for information asymmetry.
This study is subject to several caveats. First, we use IPO data for ten years
(2010-2020). However, as suggested in the previous section, the last four observation
years exhibit a significant increase in underpricing, implying a possible bias. Thus,
future studies can use panel data on that year to generate more reliable results. Second,
we document that managerial and family ownership do not affect IPO underpricing
and argue that Indonesian issuing firms’ pyramidal ownership structure may explain
the results. Accordingly, we advise future studies to analyze the effect of this
ownership structure on IPO underpricing. Thirdly, we also find that the number of
employees negatively affects IPO underpricing. Consequently, future studies can
analyze the effects of employees’ other characteristics, such as employment status,
age, and education, on IPO underpricing.

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