The Effect Of Liquidity, Profitability, Financial Leverage, And Earningper Share On The Level Of Shares Underpricing In Companies That Conduct Initial Public Offering On The Indonesia Stock Exchange In 2010-2016

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The Effect of Liquidity, Profitability, Financial Leverage, and Earnings Per Share on the Level of Shares Underpricing in Companies that Conduct Initial Public Offering on the Indonesia Stock Exchange in 2010-2016

Introduction

The initial public offering (IPO) is a significant event in the life of a company, marking its transition from a private to a public entity. It provides an opportunity for companies to raise capital from a large number of investors, while also allowing existing shareholders to sell their shares. However, the IPO process is often associated with underpricing, where the stock price of a company at the time of listing is lower than the market price during trading. This phenomenon has attracted the attention of investors, financial analysts, and regulators, making it an important topic in the financial world.

Background

The Indonesian stock market has experienced significant growth in recent years, with the Indonesia Stock Exchange (IDX) becoming one of the largest stock exchanges in Southeast Asia. The IPO market in Indonesia has also grown rapidly, with an increasing number of companies listing on the IDX. However, the underpricing phenomenon remains a concern, as it can lead to a loss of value for investors and a negative impact on the company's reputation.

Research Methodology

This study uses a descriptive statistical analysis method, classical assumptions, regression, and hypothesis testing to examine the effect of four financial variables - liquidity, profitability, financial leverage, and earnings per share - on the underpricing phenomenon in companies that conduct IPOs on the Indonesia Stock Exchange in the 2010 to 2016 period. The population used in this study consisted of 136 companies that carried out IPOs and underwent underpricing on the IDX. Through the proportional stratified random sampling method, 102 companies were selected as samples to be analyzed. The data used is secondary data obtained from trusted sources.

Research Result

The results of this study showed that:

  1. Liquidity and Financial leverage have a significant positive effect on underpricing. This means that the higher the liquidity and financial leverage of the company, the higher the underpricing level that occurs. Good liquidity shows that companies have easily disbursed assets, giving trust to investors of company growth potential. Financial leverage, on the other hand, indicates that companies have a high level of debt, which can increase the risk of default and lead to higher underpricing.

  2. Profitability has a significant negative effect on underpricing. This shows that more profitable companies tend to experience lower underpricing levels. Investors may feel more confident about companies that show good financial performance, so they are willing to pay a higher price during the IPO.

  3. Earnings per share (EPS) does not have a significant effect on the underpricing level. Although EPS is often regarded as an indicator of company performance, the results of this study indicate that in the context of the IPO on the Indonesia Stock Exchange, investors do not prioritize EPS when considering stock prices during the IPO.

Simultaneously, the four variables have a significant influence on underpricing. This shows that the company's financial aspects collectively affect investor perceptions and investment decisions during the IPO.

Analysis and Implications

This study has important implications for companies that plan to conduct IPOs. By understanding the factors that influence underpricing, companies can be better in planning stock offer strategies. For example, companies that have high liquidity and good financial leverage can potentially increase the attractiveness of investors. Meanwhile, companies with high profitability need to consider a more realistic price strategy to minimize underpricing.

On the other hand, for investors, the results of this study can be a reference to be more careful in conducting analysis of companies that will conduct IPOs. A deeper understanding of the factors that influence underpricing can help investors to make wiser investment decisions.

Conclusion

In conclusion, this research provides valuable insight into the dynamics of the Indonesian stock market, especially related to the practice of IPO. It is hoped that further research can explore more about other factors that might affect underpricing and trends that may appear in the future.

Recommendations

Based on the findings of this study, the following recommendations are made:

  1. Companies planning to conduct IPOs should consider the factors that influence underpricing, such as liquidity, financial leverage, and profitability, when planning their stock offer strategies.
  2. Investors should be more careful in conducting analysis of companies that will conduct IPOs, taking into account the factors that influence underpricing.
  3. Regulators should consider the findings of this study when developing policies and regulations related to IPOs and underpricing.

Limitations

This study has several limitations, including:

  1. Sample size: The sample size used in this study is relatively small, which may limit the generalizability of the findings.
  2. Data quality: The data used in this study is secondary data, which may be subject to errors and biases.
  3. Time period: The study only examines the period from 2010 to 2016, which may not be representative of the current market conditions.

Future Research Directions

Future research should explore more about other factors that might affect underpricing, such as market conditions, company size, and industry characteristics. Additionally, further research can examine the trends that may appear in the future, such as the impact of technological advancements on the IPO market.
Frequently Asked Questions (FAQs) about the Effect of Liquidity, Profitability, Financial Leverage, and Earnings Per Share on the Level of Shares Underpricing in Companies that Conduct Initial Public Offering on the Indonesia Stock Exchange in 2010-2016

Q: What is underpricing in the context of initial public offering (IPO)?

A: Underpricing refers to the phenomenon where the stock price of a company at the time of listing is lower than the market price during trading. This can lead to a loss of value for investors and a negative impact on the company's reputation.

Q: What are the four financial variables examined in this study?

A: The four financial variables examined in this study are:

  1. Liquidity: This refers to the ability of a company to easily convert its assets into cash.
  2. Profitability: This refers to a company's ability to generate profits from its operations.
  3. Financial leverage: This refers to the use of debt to finance a company's operations.
  4. Earnings per share (EPS): This refers to the amount of profit earned by a company per share of its stock.

Q: What are the findings of this study regarding the effect of liquidity on underpricing?

A: The study found that liquidity has a significant positive effect on underpricing. This means that companies with high liquidity tend to experience higher underpricing levels.

Q: What are the findings of this study regarding the effect of profitability on underpricing?

A: The study found that profitability has a significant negative effect on underpricing. This means that companies with high profitability tend to experience lower underpricing levels.

Q: What are the findings of this study regarding the effect of financial leverage on underpricing?

A: The study found that financial leverage has a significant positive effect on underpricing. This means that companies with high financial leverage tend to experience higher underpricing levels.

Q: What are the findings of this study regarding the effect of earnings per share (EPS) on underpricing?

A: The study found that EPS does not have a significant effect on underpricing. This means that investors do not prioritize EPS when considering stock prices during the IPO.

Q: What are the implications of this study for companies planning to conduct IPOs?

A: The study suggests that companies planning to conduct IPOs should consider the factors that influence underpricing, such as liquidity, financial leverage, and profitability, when planning their stock offer strategies.

Q: What are the implications of this study for investors?

A: The study suggests that investors should be more careful in conducting analysis of companies that will conduct IPOs, taking into account the factors that influence underpricing.

Q: What are the limitations of this study?

A: The study has several limitations, including a relatively small sample size, the use of secondary data, and a limited time period.

Q: What are the future research directions suggested by this study?

A: The study suggests that future research should explore more about other factors that might affect underpricing, such as market conditions, company size, and industry characteristics. Additionally, further research can examine the trends that may appear in the future, such as the impact of technological advancements on the IPO market.

Q: What are the practical implications of this study for regulators?

A: The study suggests that regulators should consider the findings of this study when developing policies and regulations related to IPOs and underpricing.

Q: What are the potential applications of this study in the real world?

A: The study has potential applications in the real world, such as helping companies to plan their IPOs more effectively, and providing investors with more accurate information about the companies they are considering investing in.