The Effect of Underwriter's Reputation,
Auditor's Reputation, and Leverage on Underpricing with Concentrated Ownership
As a Moderation Variable
Hasna Nur Afifah1,
Rosidi2, Djuni Farhan3
Universitas Gajayana Malang, Indonesia
Email: [email protected]
� Corresponding
Author: Hasna Nur Afifah
|
Abstract |
|
|
Underwriter reputation; auditor reputation; leverage;
concentrated holdings |
The phenomenon of
underpricing in Initial Public Offerings (IPOs) is still a major concern in
the Indonesian capital market, especially in ensuring market efficiency and
optimal investment decision-making. This study aims to analyze the influence
of underwriter reputation, auditor reputation, and leverage on stock
underpricing, with concentrated ownership as a moderation variable. This
study uses a quantitative method with a descriptive and causal approach. The
sample consisted of 363 companies that conducted IPOs on the Indonesia Stock
Exchange (IDX) in 2011-2021, which were selected using the purposive sampling
method. Secondary data is obtained through IPO prospectus documentation and
stock price information from the official portals of IDX, TICMI, and
e-bursa.com. Data analysis was carried out using moderation regression, with
hypothesis testing through t-test at a significance level of 5%. The results show that
the underwriter's reputation and leverage do not have a significant effect on
underpricing, while the auditor's reputation has a significant negative
influence. Concentrated ownership does not function as a moderating variable
in the relationship between independent variables and underpricing. The
implications of this study provide insights for companies, underwriters, and
regulators to pay more attention to auditor quality factors in the IPO
process to improve transparency and efficiency of the capital market. This
research also opens up opportunities for further exploration of other factors
that affect underpricing in the Indonesian capital market.
under the terms and conditions of the Creative Commons Attribution (CC BY SA) license (https://creativecommons.org/licenses/by-sa/4.0/). |
1 Introduction
An Initial Public Offering (IPO) is one of
the strategic steps for companies to obtain new sources of capital without
incurring debt payment obligations. The IPO process in various countries,
including Indonesia, is carried out through a capital market mechanism
supervised by financial authorities such as the Indonesia Stock Exchange (IDX)
and the Financial Services Authority (OJK). In this process, the company is
assisted by an underwriter to determine the initial share price that is
attractive to investors while also reflecting the fair market value.
However, the phenomenon of underpricing,
where the initial stock price is set lower than the market value should be, is
still a global issue that affects the efficiency of the capital market. This
practice is common in both developed and developing markets, including in
Indonesia. This issue involves a variety of factors, such as the underwriter's
reputation, auditor's reputation, and company leverage, which can affect the
level of underpricing. In addition, a company's ownership structure,
particularly concentrated ownership, can be a moderation variable that
strengthens or weakens the relationship between these factors and underpricing
rates.
In a global context, the role of reputable
underwriters and auditors is in the spotlight in ensuring transparency and
investor confidence in the IPO process. Nonetheless, the company's ownership
structure and leverage levels also reflect the risks faced by potential
investors. The influence of these factors on underpricing can vary
significantly between different countries, depending on the characteristics of
the capital markets and applicable regulations. Therefore, understanding the
dynamics of these factors in a local context as well as comparing them with
global practices is essential to create a more efficient and internationally
competitive capital market.� According to
Darmadi and Gunawan (2013) companies can enjoy a number of benefits by going
public, which allows them to get additional financing for the company without
risks such as those that may arise from debt.
Based on the IDX press release on December
30, 2021, as many as 54 companies conducted IPOs in 2021. The total funds
collected reached 62 trillion rupiah and increased by 100 percent from 2020.
This makes Indonesia survive as the exchange with the most IPOs since 2019. Not
only that, from the investor side, it also achieved positive achievements,
namely by increasing the number of domestic investors by 97.7%.��� In addition, data from the Indonesia Stock
Exchange (IDX) shows that in 2021, there were 54 companies that conducted IPOs
with a total of IDR 62.61 trillion raised. This amount increased significantly
compared to the previous year and is the highest fundraising value in the
history of the Indonesian capital market. The increase in the number of IPOs
and funds raised reflects the high interest of companies to go public, which is
in line with Darmadi and Gunawan's findings that companies can obtain
additional financing through IPOs without the risks that may arise from debt.
In addition, the number of investors in the
Indonesian capital market has also increased significantly. The total number of
investors as of December 29, 2021 increased by 92.7 percent to 7.48 million
investors from the previous 3.88 million investors as of the end of December
2020. The increase in the number of investors was dominated by domestic
investors under the age of 30, reaching around 59.98 percent of the total
investors.
Research on IPOs, especially the phenomenon
of underpricing, is of major concern because of its impact on market efficiency
and investment decisions. Underpricing is a phenomenon that often occurs in the
IPO process, both in the capital markets of developed and developing countries.
Previous studies have shown the prevalence of underpricing in almost all of the
world's capital markets, including in Hong Kong (Keasy & McGuinness, 2008)
and India (Deb & Marisetty, 2010). This phenomenon is no exception in Indonesia,
which still faces similar challenges in the IPO pricing process.
Previous research has identified several key
factors that affect underpricing rates, such as underwriter reputation, auditor
reputation, and leverage (Beatty, 1989). However, the gap in research lies in
the lack of in-depth exploration of how the latest IPO trends and regulatory
changes in Indonesia, such as the strengthening of transparency policies and
capital market supervision by the Financial Services Authority (OJK), affect
this phenomenon. With the increasing number of IPOs in Indonesia in recent
years, it is important to evaluate whether the factors that have been
previously identified remain relevant or need to be adapted to the local
context. This research aims to provide practical insights that can help
stakeholders in optimizing the IPO pricing process, thereby supporting the
development of a healthier and more efficient capital market.
Therefore, this study aims to analyze: (1)
the influence of underwriter's reputation on underpricing rates; (2) the
influence of auditor reputation on the level of underpricing; (3) the effect of
leverage on the underpricing level; (4) the effect of ownership moderation is
concentrated on the relationship between underwriter reputation and
underpricing rates; (5) the effect of ownership moderation is concentrated on
the relationship between auditor reputation and underpricing rates; (6) the
effect of ownership moderation is concentrated on the relationship between
leverage and underpricing rates
Underpricing is basically an initial stock
price that is lower than the price it should be at in line with the value and
quality of the company. Hasan et al (2013) stated that companies sell shares at
underpricing prices as compensation to investors for ex-ante uncertainty due to
information asymmetry. From the underwriter side, underpricing is deliberately
to maximize the absorption of shares by investors, so that the loss of
obligations as an underwriter is reduced (Adams et al, 2008).
Prospective issuers will choose an
underwriter with good quality and reputation to handle their IPO. Underwriters
with a good reputation can reduce information asymmetry between potential
issuers and potential investors (Su & Bangassa, 2011) and reduce
information asymmetry between them and potential issuers (Boonchuaymetta &
Chuanrommanee, 2013). A good underwriter's reputation shows that the
underwriter is experienced in handling many stock offerings, so they have a
better knowledge of the capital market and can determine the offering price at
the time of the IPO according to the needs (Razafindrambinina & Kwan,
2013).
As a party that checks the fairness of
financial statements, auditors are parties trusted by the public. They provide
information that investors can use in assessing companies that are IPO. For
this reason, auditors are required to have high independence and
professionalism. Auditors have an important role in reducing information
asymmetry between internal parties and potential investors by investigating
whether the financial statements are in accordance with accounting principles
and there are no misstatements (Beatty, 1989). Qualified auditors with a good
reputation are expected to prevent and reduce malpractices and be better at
finding and reporting irregularities in financial statements (Gumanti, et al.,
2015).
Leverage is the ability of a company to
leverage its existing assets and resources to gain a company's profits. The
leverage ratio also indicates the risks that the company faces (Lee, et al.,
2003). According to Gumanti (2000), leverage is divided into two, namely:
financial leverage and operational leverage. In financial leverage, the
company's resources and assets come from debt. When debt is put into a
company's capital sources, the volatility of the company's profits is higher.
High volatility is a high risk that will make shareholders demand higher
returns.
The ownership structure reflects the
proportion of share ownership and reflects the proportion of owners' rights
(Shinta & Ahmar, 2011). Concentrated ownership is one of the norms of
corporate governance (Jensen & Meckling, 1976). In the context of a company
conducting an initial public offering, concentrated ownership increases
external control so that the IPO value is higher (Stoughn & Zechner, 1998).
Companies with concentrated ownership tend to have high uncertainty (Harjoto
& Garen, 2005) and high uncertainty will increase low prices. Viewed from
the perspective of signal theory, concentrated ownership during an IPO is a
high amount of retained ownership, indicating good prospects for the company in
the future thereby increasing investor interest (Al-Shammari, et al.,
2013).�
2 Materials
and Method
This
study uses a type of quantitative research with a descriptive and causal
approach. The research was conducted on companies that conducted an Initial
Public Offering (IPO) on the Indonesia Stock Exchange (IDX) in 2011-2021. The
research sample was selected using the purposive sampling method, with certain
criteria so that 363 samples were obtained. The data collection technique is in
the form of secondary data obtained through documentation techniques, namely
the prospectus of the initial public offering of shares in the 2011-2021 period
and information on the closing price of shares on the date of the offering. The
data is accessed through the official portal of the Indonesia Stock Exchange
(idx.co.id), the Indonesian Capital Market Institute (TICMI), and e-bursa.com,
which is a financial and capital market platform in Indonesia.
Data
analysis was carried out using moderation regression analysis to test the
influence of independent variables on dependent variables by considering the
effect of moderation variables. Before regression analysis is performed,
classical assumption tests including heteroscedasticity, multicollinearity, and
normality tests are performed to ensure the feasibility of the regression
model. Hypothesis testing was carried out using a t-test with a significance
level (alpha) of 5%.
3 Results and Discussions
����
Results
of the Classic Assumption Test
��������������� The results of the
classical assumption test are summarized in Table 1 below.
���������� Table 1. Summary of Classical
Assumption Test Results
|
Test |
Test Equipment |
Result |
Conclusion |
|
Classic
Assumptions: |
|
|
|
|
Multicollinearity |
VIF |
The value is
< 10 |
Not violated |
|
Heteroscedasticity |
Plot Spread |
Irregular images |
Not violated |
|
Normality |
Kolmogorof-Smirnov |
The value of
sig. < 5% |
*) violated |
In Table 1 above, it
appears that the results of the classical assumption test of heteroscedasticity, multicollinearity, show that nothing is violated. However, the
classical assumption test of normality showed < 5% (violated). *) However, based on the "Central Boundary
Theorem" by Gujarati (2016), the assumption of residual normality can be
ignored if the number of observations is large enough. It is understood that
the sample of this study is very large, namely 363 companies. The number of
samples is quite large, far above the Slovin minimum sample formula and the
sample is at least 10x the number of variables. Thus, the assumption of
normality in this study can be ignored.
Multiple Linear Regression Analysis Results
�� The
results of the double linear regression analysis are summarized in the
following table 2
Table 2.
Results of Double Linear Regression Analysis
|
Information |
Regression
coefficients |
P-value |
Conclusion |
|
UND (x1) |
-0,783 |
0.191 > 5% |
hypothesis-1 rejected |
|
AUD (x2) |
-0,205 |
0.000 > 5% |
Hypothesis-2 accepted |
|
LEV (X3) |
-0,117 |
0.055 > 5% |
hypothesis-3 rejected |
Results of Moderation Multiple Linear Regression Analysis
��������������� The results of the moderation double linear regression analysis are
summarized in Table 3 below����������������������
Table
3. Summary of
the Results of Moderation Multiple Regression Analysis
|
Information |
Regression
coefficients |
P-value |
Conclusion |
|
X1*Z |
0,170 |
0.666 > 5% |
hypothesis-4 rejected |
|
X2*Z |
1,411 |
0.731 > 5% |
hypothesis-5 rejected |
|
X3*Z |
-0,064 |
0.215 > 5% |
hypothesis-6 rejected |
�������������������������� a. Dependent
Variable: underpricing
DISCUSSION
The Effect of Underwriter's Reputation
on Underpricing
The results of the first hypothesis test show
that� the �underwriter's �reputation has no effect on
the underpricing value, I support the research of Martani,
et al. (2012), Pahlevi (2014), and Diana (2022). Pahlevi (2014) stated that all stock IPOs can use� an underwriter with a good reputation,
so� that the underwriter's reputation is not necessarily interpreted as a good
initial public offering and reduces underpricing.
According to Diana (2022), the
underwriter's reputation has little effect on underpricing, because the
majority of agreements are full commitments �so that the offering price is more determined
by underpricing and if the shares are not sold, the underwriter is willing to
bear it in full.The
fact that the underwriter sells shares at the desired price, reinforces
the existence of agency conflict and information asymmetry between the company
as an issuer and �the underwriter.
Underwriters are more aware of market conditions and prioritize the sale of
shares so that they are sold at a price level that maximizes their profits, no
matter how good the underwriter's reputation is.
According to Dimovski et al., (2011), underwriters have the possibility to
sell shares at �an underprice price according to the hypothesis stated by Loughran
and Ritter (2004).� Loughran and Ritter
(2004) stated that according to The
Changing of Issuer's Objective Hypothesis, a company is willing to
underprice its shares as long as it is guaranteed by a reputable underwriter.
Loughran and Ritter (2004) also gave a conclusion from The Analyst Lust Hypothesis, that companies are willing to
underprice more because underwriters have
a larger scope of analysis. The scope of analysis is research conducted by
stock underwriting companies in the capital market with the aim of reporting
research to their clients. The market pressure to use underwriters with large
research reports is quite high, and the flexibility of underwriters to set bid prices is provided as
compensation for the high cost �of underwriter research.� Hiring an underwriter with a good reputation and quality can be done by
all prospective issuers (easy to imitate). Thus, investors cannot distinguish
the quality of a good or bad issuer just by looking at the underwriters who
guarantee IPO shares (Utomo, 2019).
The Effect of Auditor Reputation on Underpricing
The results of the second hypothesis test
show that the auditor's reputation has �a significant negative effect�
on underpricing, supporting
previous research conducted by Razafindrambinina and
Kwan (2013) that the better the quality of the auditor, the smaller the
underpricing value. The research of Purwanto and Mahyani
(2016) also explains that the reputation of auditors has a significant negative
effect on underpricing. Auditors who
have a high reputation are used as guidelines for the quality of issuer companies.
Darmadi and Gunawan (2013) also stated that auditors with high reputations have
a significant role in reducing information asymmetry between companies and
potential investors so that underpricing can
be suppressed.
According to Oh, et al, 2017) on auditing as
a determinant of a company's eligibility for IPO, states that companies with
poor performance will not be able to provide high fees to auditors. Large audit
fees are usually related to the size of the audit firm. This research is also
in line with Lee et al. (2003), and Darmadi and Gunawan (2013) who prove that
credible auditors will reduce the rate of underpricing. The auditor's
endorsement of the financial statements depends on the level of openness in the
financial statements themselves, and the endorsement is very important because
it plays a role in ensuring the credibility and reliability of a financial
report. Reputable auditors reduce information asymmetry Darmadi and Gunawan
(2013), that financial statements that have been audited by auditors with a
better reputation guarantee the content of the report.
Effect of Leverage on Underpricing
The results of the third hypothesis test show
that leverage has no effect on the
value of underpricing, supporting the research of Agathee
et al., (2012), which explains that variables related to accounting variables
have no effect on underpricing. Research
in Indonesia by Kristiantari (2012) and Gunawan and
Jodin (2015) also did not show the effect� of leverage
on underpricing. This is related
to the public's distrust of the information contained in the financial
statements and the financial statements do not reflect the actual state of the
company. In the research of Isynuwardhana and Febryan (2022), leverage does not have a significant effect
on undepricing, because the value of leverage does
not necessarily reflect the level of risk faced by the company.
The Relationship Between Underwriters and Underpricing
Reputation �with Concentrated Ownership
as a Moderating Variable
The results of the hypothesis test showed
that the variable of the interaction of the underwriter's reputation with
concentrated ownership had a significance value of 0.666 >0.05 so that the
fourth hypothesis was rejected. This means that the existence of concentrated
ownership is not a moderating variable in the relationship between underwriter� reputation and underpricing. Although
not significant, the direction of the coefficient of this study supports the
statement of Al-Shammari et al., (2013) which states that concentrated
ownership will be a signal regarding the quality and prospects of the company.
The existence of moderation variables makes the relationship �between the negative reputation of the underwriter �and underpricing insignificant, if the higher the concentrated
ownership, the higher� the reputation of the underwriter and underpricing will decrease.
The ownership concentrated in this study is
not a signal that the company will have good prospects or control over
management as part of corporate
governance. In Indonesia, ownership tends to be concentrated and owned by
the founding family of the company, where the management is also controlled by
the founding family. This is also related to the purpose of the initial public
offering which is not only to obtain capital. According to the IDX in idx.com,
it is stated that the stock offering will also be a means of publication for
the company, making it easier to introduce the company's products. The
existence of this goal makes companies with concentrated owners tend to pay
less attention to the value of
underpricing.
The Relationship Between Auditor Reputation and
Underpricing with Concentrated Ownership as a Moderation Variable
�The
results of the fifth hypothesis test of this study have a significance value of
0.731 > 0.05, indicating that this result is not significant so the fifth hypothesis is rejected.The
existence of concentrated ownership is not a signal about the quality of the
company, which reduces asymmetry and affects underpricing. This statement is supported by Darmadi and Gunawan
(2013) investors do not see ownership in a company as quality. In the
Indonesian capital market environment, concentrated ownership is still a
characteristic of all companies, so it is likely that it is not something
special as a signal of company quality. Stock ownership in Indonesia, as is
often the case in the research sample, where the majority of individual owners
are still owned by the old owners related to company management. The
relationship between the old owner and the management can certainly affect the
management control. In Indonesia, the existence of an ownership structure may
not be considered as something that can increase or decrease the value of the
company in the eyes of investors, because there is still intervention behavior
by the old owners against the management.
The Relationship Between Leverage and Underpricing with Concentrated Ownership
as a Moderation Variable
The sixth hypothesis of this study has a significance value of 0.215
>0.05 so that the sixth hypothesis is rejected. Concentrated ownership is
not a moderating variable between the auditor's reputation variable and low prices. The results of this study do
not prove concentrated ownership as a signal regarding the quality and
prospects of the company. Concentrated ownership in Indonesia is a
characteristic of almost all companies, so it does not show the quality of the
company. This study does not support the research of AlShammari et al. (2013)
which proved concentrated ownership as a moderating variable between high
uncertainty during IPOs and underpricing.
According to Darmadi and Gunawan (2013), concentrated ownership in
Indonesia is not related to underpricing and
the desire of majority owners prevents other concentrated owners. This is
because in the Indonesian capital market environment, the percentage of initial
share sales is still relatively small. So there will
be no other possibility of concentrated ownership even if the IPO investor is
centralized. The third hypothesis
regarding the moderation of concentrated ownership is rejected, meaning that
the existence of concentrated ownership does not significantly reduce or
increase underpricing. Widarjo et al. (2020) said
that the existence of concentrated ownership reflects the full right to control
of the company, including the determination of the company's strategic policies
and control over management. These forces will increase the issues around efforts
to maximize their own wealth and not companies and potential investors see this
as poor performance in the future. Thus, it is very possible that the majority
owner has his own strategy and is not affected by the offering price of the
shares.
4 Conclusion
The results of the study show that the
reputation of the underwriter does not have a significant influence on the
level of underpricing of shares in IPO companies on the Indonesia Stock
Exchange (IDX) for the 2011-2021 period. In contrast, the auditor's reputation
has a significant negative effect, suggesting that high-quality auditors are
able to reduce underpricing rates. The company's leverage has no effect on the
level of underpricing, reflecting investors' distrust of the information
presented in the financial statements. In addition, concentrated ownership does
not play a moderating role in the relationship between underwriter's
reputation, auditor reputation, or leverage with underpricing levels. This
conclusion provides new insights into the dynamics of IPOs in Indonesia, where
factors such as auditor reputation are more prominent than other variables in
influencing the initial share price. These results can be a reference for
stakeholders in the IPO process to optimize their strategies and improve capital
market efficiency.
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