International Journal of Civil Engineering and Technology (IJCIET)
Volume 10, Issue 04, April 2019, pp. 583-589. Article ID: IJCIET_10_04_060
Available online at http://www.iaeme.com/ijciet/issues.asp?JType=IJCIET&VType=10&IType=04
ISSN Print: 0976-6308 and ISSN Online: 0976-6316
© IAEME Publication
Scopus Indexed
UNDERPRICING: MACROECONOMIC
VARIABLES
Adler Haymans Manurung
Doctor Research in Management, Binus Business School – Bina Nusantara University
Jenry Cardo Manurung
Doctoral Student of Gunadarma University
ABSTRACT
This paper has objective to explore macroeconomic Variables to affect initial return
(underpricing) for period 2000 to 2018. Underpricing is calculated by closing price
on the first day of trading in stock market compared to price of Initial Public Offering
(IPO), sometimes its called Initial Return. Vector Autoregressive is used to get variable
that affected underpricing. The result shows that variable of Initial Return Lag one
and two, Inflation and variables of Oil prices significantly affected Underpricing in
Indonesia market.
Keywords: Underpricing, market return, macroeconomic variables, oil price, inflation,
Exchange Rate, Vector Autoregressive.
Cite this Article: Adler Haymans Manurung and Jenry Cardo Manurung,
Underpricing: Macroeconomic Variables, International Journal of Civil Engineering
and Technology, 10(4), 2019, pp. 583-589.
http://www.iaeme.com/IJCIET/issues.asp?JType=IJCIET&VType=10&IType=04
1. INTRODUCTION
Since Ibbotson (1975) publish his research about underpricing and also define concept
underpricing become popular and many academician in finance starting do research for
underpricing. Mostly research underpricing did in developed market, because their have stock
market. When academician discussed underpricing, it always discussed in developed market.
Behavior underpricing in developed market should be different with emerging market such as
Indonesia’s Market and others similar to them.
Underpricing was first time to show the number by Ritter (1991) and he also documented
all data Underpricing. He documented Underpricing of 17,8% for period 1980 to 2017 for US
Company. Aggarwal et.al (1993) documented Underpricing of three country which is 78.5%
for Brazil; 16,7% for Chili and 2.8% for Mexico. Levis (1993) documented average
underpricing of 14.3% for UK in period 1980 -1988. Bildik and Yilmaz documented average
http://www.iaeme.com/IJCIET/index.asp
583
editor@iaeme.com
Underpricing: Macroeconomic Variables
underpricing of 5,94% for period 1990 to 2000 in Instanbul Market. Manurung et.al (2019)
documented average underpricing of 31,89% for period 2000 to 2017.
Underpricing of stock price is affected some variable when offering stock to public.
Reputation of Underwriter could affect underpricing of stock price in offering period (Carter
ad Manaster, 1990 and Carter, Dark and Sing, 1998). Reputation of Investment Banking could
also affected underpricing of stock price in offering period (Beatty and Ritter, 1986). Alti
(2005) discuss about market timing for offering stocks. Aggarwal, Prabhala and Puri (2002),
and How and Low (2000) discuss about institutional allocation of stock offering. Grinblatt and
Hwang (1989) discuss about signaling the company of offering stock. Agarwal, Liu and Rhee
(2008) and Baron (1982) discuss about investor demand for IPO and Aftermarket Performance.
Arifin (2010), Setiobudi et.al (2011), Hutagaol et.al (2011), Manurung et.al (2019) are only
discuss Underpricing IPO of Indonesia with internal variable company. All discuss
underpricing does not mention about macroeconomics variables, it means that research of
underpricing of stock offering is still limited until now.
Based on previous explanation of previous research, there is limited empirical research on
underpricing in Indonesia’s case. So, this paper wants to explore the underpricing of IPO price
in Indonesia market especially macroeconomics variable affect underpricing. This paper will
contribute to empirical research of underpricing, especially in Indonesia’s market.
2. THEORETICAL REVIEW
Sharpe (1964), Lintner (1965) and Mossin (1966) introduced the Capital Asset Pricing Model
(CAPM) to explain that return of a stock was affected by return of risk free rate and it’s risk
premium. Then Ross (1976) introduced Arbitrage Pricing Theory (APT), that said Return a
stock affected by many factor. Ross (1976) also critiqued the CAPM that introduced by
Sharpe, Lintner and Mossin. Then, some researcher and academician discussed it and
mentioned that other factor also affected stock return, which is research first time by Chen,
Roll and Ross (1986). The CAPM Model is as follows:


E ( Ri ) = R f +  i E ( RM ) − R f + 
(1)
The term of ε can be divided to be internal factor and external factor. So ε can be wrote as
follows:
 i = b2 Inft + b3 ERt + b4OILt + 
(2)
Equation (2) is be substituted to Equation (1) will become as follows:


E ( Ri ) = R f +  i E ( RM ) − R f + b2 Inf t + b3 ERt + b4OILt + 
(3)
This equation 3 become a base of model this research, but this research will leave the R f.
Term error of ω can be divided to become two which is variable of internal factor and others.
Most researcher has done research about underpricing with variable of internal company.
Carter ad Manaster (1990) and Carter, Dark and Sing (1998) explored about Reputation of
Underwriter could affect underpricing of stock price in offering period. Beatty and Ritter
(1986) did research about Reputation of Investment Banking could also affected underpricing
of stock price in offering period Alti (2005) examined about market timing for offering stocks.
Aggarwal, Prabhala and Puri (2002), and How and Low (2000) also examined about
institutional allocation of stock offering. Grinblatt and Hwang (1989) explored about signaling
the company of offering stock. Agarwal, Liu and Rhee (2008) and Baron (1982) explored
about investor demand for IPO and Aftermarket Performance.
http://www.iaeme.com/IJCIET/index.asp
584
editor@iaeme.com
Adler Haymans Manurung and Jenry Cardo Manurung
Inflation as macroeconomic indicator has relationship to return stock or stock market.
Inflation has negatively relationship with stock return. If Inflation increase, Net profit company
will decrease because cost of company will increase. But, inflation is called as a hedge of
investment in stock (Bodie, 1976). Nelson (1976) examined relationship inflation and stock
market returns. Fama and Schwert (1977) reported their research, that U.S. government bonds
and bills were a complete hedge against expected inflation, and private residential real estate
was a complete hedge against both expected and unexpected inflation. Kaul (1987) also
examined relationship inflation and stock markets. He mentioned that relationship be caused
the equilibrium process in the monetary sector. Kilian and Park (2009) also examined
relationship inflation and Stock Market in USA markets.
Exchange rate has positive relationship with stock market. If Exchange rate increase, the
stock market will increase. When exchange rate increase, foreign investor have more money
to invest. The more money to invest make demand to increase that it will affect the price in the
market increasing. Many academician has done research relationship exchange rate and stock
market, such as Abdalla et.al (1997); Dimitrova (2005); Homma et.al (2005); Agrawal et.al
(2010); Lee, Doong and Chou (2011); Hajilee and Nasser (2014) and Suriani et.al (2015). Most
their research found that exchange rate has relationship to stock markets.
Oil Price has relationship with stock return and some countries found that Oil price is
majority factor to explain stock return. Hamilton (1993) started to study Oil Price to
Macroeconomy especially related to Stock Markets. Kaul (1996) has focused to examine
relationship Oil Price and Stock markets. He found that te reaction of United States and
Canadian Stock prices to oil shocks can be completely accounted for by the impact of these
shocks. Kling (1985) examined relationship Oil Price Shocks with stock market Behavior.
Papapetrou (2001) examine dynamic relationship oil Price, stock market and interest rate and
economic activity in Greece. He also used VAR to examine this relationship. Kilian and Park
(2009) also examined Impact of Oil Price Shocks on the US Stock Market. Antonakakis and
Filis (2013) also examined relationship oil price and Stock market using time varying approach.
Bouoiyoue et.al (2017) examined response of stock return to oil price shocks.
3. METHODOLOGY
As mentioned in the title of this paper is “Underpricing: Macroeconomics Variables” that
means paper will explore about initial return affected by macroeconomics variables. Based on
the title, the methodology will firstly show the calculating of initial return as proxy
underpricing. Then, it will explain to test of initial return comparing affected by
macroeconomics variables. Initial Return is calculated as follows:
Ri,t = (PCFD - PIPO) / PIPO * 100%
(4)
where Ri,t = initial Return stock i at period t.
PCFD = stock price of stock i at closing first day
PIPO = stock price of stock i at Initial Public Offering
The data was collected from Indonesia Stock Exchange and Central Bank of Indonesia.
Initial Return sometimes called underpricing of stock in primary market. There is 415 company
that has offered stock to public since January 2000 to December 2018. This Research used
first dummy variable to show period of financial crisis in 2008 – 2009, set as Zero for this
period and one for others. The second dummy is to show that company has offering stocks
more than one company in the month, if only one company offer stock in the month, so we set
dummy one as zero and 1 for others.
http://www.iaeme.com/IJCIET/index.asp
585
editor@iaeme.com
Underpricing: Macroeconomic Variables
Sims (1980) introduced Vector Autoregressive to estimate relationship among variable in
discussing of economics Variables. The relationship is dynamic which is model VAR (p) as
follows:
yt = a0 + b1 yt −1 + b2 yt −2 + ... + b p yt − p + 
(5)
Equation (5) show that the dependent variable yt affect by himself with lag one until lag p.
Sometimes, we know that the dependent variable could be affected by other variable. Brook
(2014, 335) stated that VAR (1) also is affected by other variable with model as follows:
yt = a0 + a1 yt −1 + b1 X1 + b2 X 2 + 
(6)
Equation (6) is a base model this paper with three other variable.
Brooks and Tsolacos (1999) used VAR to estimate relationship Impact of Financial factors
on UK Property Performance. Papapetrou (2001) used VAR to examine dynamic relationship
oil Price, stock market and interest rate and economic activity.
The VAR Model is used in this research as follows:
2
IRt =  IRt −i + c + b1 RM t + b2 RIFt + b3 RKURS + b4 ROIL + b5 D1 + b6 D2 + 
i =1
(6)
IRt = Underpricing at t
RMt = market return at t
RIFt = inflation at t
RKURSt = return exchange rate at t
ROILt = return of Oil Price at t
RFEDt = Fed Rate at t
D1 = 0 for 2008 and 2009 and 1 for others
D2 = 0 for only one company offering stocks to market and 1 for others.
4. ANALYSIS
In this paper, the analysis will divide into two group which is analysis of descriptive statistics
and analysis of causal effect to Initial return. The analysis is starting Descriptive Statistics and
later to analysis of causal effect using Vector Autoregressive.
4.1. Descriptive Statistics
Table 1 showed statistics descriptive that used this research. Underpricing (Initial Return) has
average return of 33,79% for period 2000 to 2019. It means, the founder company get lower
price when they sell the company stocks to public. There is two factor why the receive offering,
such as: underwriter forced to accept the price and the founder want to avoid invisible hand to
make inefficiency in the company. The maximum of underpricing could be reached 480% for
the period, so Investor has opportunity to get return very high. This research has standard of
deviation of 42,96%, it means the high variety for underpricing.
http://www.iaeme.com/IJCIET/index.asp
586
editor@iaeme.com
Adler Haymans Manurung and Jenry Cardo Manurung
Table 1 Statistics of Descriptives some economic Variable
IR
RM
Mean
33.79%
1.45%
Median
24.19%
1.78%
Maximum
480.00%
20.13%
Minimum
-100.00%
-31.42%
Std. Dev.
43.96%
5.42%
Skewness
3.45
-0.55
Kurtosis
30.70
6.63
Jarque-Bera
14085.7
248.84
Probability
0
0
Observations
415
415
Sources: Researcher Processing
RIF
4.83%
4.33%
18.38%
-0.45%
3.05%
1.40
6.73
375.567
0
415
RKURS
0.88%
0.68%
11.54%
-6.20%
2.57%
0.94
6.15
232.35
0
415
ROIL
-0.25%
0.51%
21.30%
-26.47%
8.30%
-0.76
4.08
59.918
0
415
Market Return is average of 1,45% and it has standard of deviation of 5,42%. This figure
showed that market Indonesia in the good environment when there is a time of offering Stocks.
Average Inflation is 4,83% for the period and standards of deviation is 3.05%. Exchange Rate
has average growth of 0,88% for the period of research. Small of the figure average growth of
exchange rate also showed by standard of deviation of 2.57%. Average of Oil price (growth)
is negative of 0.25% and the standard of deviations is 8.30%. This figure showed that Oil Price
does not increased so much when the company is offering stocks. The normality is very
important for doing research, when research use time series data. All variable in this research
has distribution of normality which is using Jarque-Bera Test.
As mentioned Sims (1980) that VAR will be used if data is stationer in level. Then we test
the variable that it used in this paper which is Initial Return (IR), Market Return, Inflation,
Exchange rate, and oil price at the level data. This research find that all variable significantly
has stationer in data level at significantly of 5%. Based on this result we will use VAR to test
all variable independent to affect dependent variable of Initial Return.
This paper run VAR model using dependent variable of Initial return and independent
variable of Market Return, Inflation, Exchange Rate, and Oil Price. Based processing using
Eviews-10, the model as follows:
R2 = 17,02%
F-Statistic = 10.3607
Based on the equation above, this research found that inflation and Oil Price has
significantly affected initial return, but Market return, and exchange rate does not significant
affected Initial return (7). Inflation and Oil price has negative effect to variable initial return. It
means that if Inflation and Oil price increase, it will affect to decrease initial return. Initial
Return Lag one and Initial Return Lag 2 are also significantly affect initial return. This research
also give policy to management Company that company should consider to postpone it’s IPO,
when Inflation and Oil price increase. The model above is significantly fit as a model for
predicting underpricing. All variable independent can explain variation of Underpricing about
17,02%. This figure also explain that other factor has higher to explain variation of
underpricing.
http://www.iaeme.com/IJCIET/index.asp
587
editor@iaeme.com
Underpricing: Macroeconomic Variables
Inflation has significantly affected initial return that means also supporting previous
research such as Bodie (1976); Nelson (1976); Fama and Schwert (1977); Kaul (1987) and
Kilian and Park (2009) even to sign the variable. As Mentioned before that oil price
significantly affected underpricing, it means that his research also found similar to previous
research such as Hamilton (1993); Kaul (1996); Kilian and Park (2009); Kling (1985);
Papapetrou (2001); Kilian and Park (2009); Antonakakis and Filis (2013) and Bouoiyoue et.al
(2017).
This paper has a weakness that is in methodology to estimate relationship. Data panel in
time series is used in this research and to be forced using VAR. VAR in data Panel should be
good to solve the estimation relationship it.
5. CONCLUSION
This paper has conclusion as follows:
1. All variable that used in this research has stationer, so Vector Autoregression should
use to estimate relationship among variables.
2. Dummy variable does not siginificantly affect Underpricing the stocks. It means,
Suversory body which is Otoritas Jasa Keuangan (Financial Sevices Agency) do not
have a hesitation to issue a letter of permit to more than one a company in the month.
3. Inflation has significantly negative affected underpricing.
4. Oil Price has significantly negative affected underpricing.
REFERENCES
[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
[10]
[11]
[12]
[13]
Abdalla, I.S., and V. Murinde (1997), Exchange rate and stock price interactions in
emerging financial markets; Applied Financial Economics, 7, 25-35.
Agarwal, S.; Liu, C. and S. Gon Rhee (2008) Investor demand for IPOs and Aftermarket
Performance: Evidence from Hongkong Stock Market; International Financial Market,
Institutions, and Money; Vol. 18. pp. 176 – 190.
Alti, Aydogan (2005); IPO Market Timing; Review of Financial Studies, Vol. 18, No. 3;
pp. 1105 – 1138.
Antonakakis, N. and George Filis (2013); Oil prices and stock market correlation: A timevarying approach; International Journal Energy Statistics; Vol. 1; p. 17 - 29
Arifin, Z. (2010); Potret IPO di Bursa Efek Indonesia; Jurnal Siasat Bisnis Vol. 14 No. 1,
April, pp. 89–100
Baron (1982); A model of the demand for Investment Banking Advising and Distribution
services for new Issues; Journal of Finance, Vol. 37; pp. 955 – 976
Beatty, N. and J, Ritter (1986), Investment Banking Reputation and Underpricing of Initial
Public Offering; Journal of Financial Economics, Vol. 15; pp. 213 – 232.
Bouoiyour, J., Erna, S., Shahzad, S. J. S. ESD, and M. Shahbaz (2017) Response of Stock
Returns to Oil Price Shocks: Evidence from Oil Importing and Exporting Countries;
Journal of Economic Integration Vol.32 No.4, December 2017, 913~936
Brooks, C. and S. Tsolacos (1999); The Impact of Economic and Financial Factors on UK
Property Performance; Journal of Property Research, Vol. 16, No. 2; pp. 139 - 152
Carter, R. and S. Manaster (1990); Initial Public Offerings and Underwriter Reputation;
Journal of Finance, Vol. 45, pp. 1045 – 1067.
Carter. R.; Dark, F. and A. Singh (1998); Underwriter Reputation, Initial Returns and the
Long-run Performance of IPO Stocks; Journal of Finance, Vol. 53; pp. 285 -311
Chen, N. F.; Roll, R. and S. A. Ross (1986); Economic Forces and Stock Market; Journal
of Business, Vol. 59, No. 3 ; pp. 383 – 403.
Grinblatt, M. and C. Hwang (1989); Signaling and the Pricing of New Issues; Journal of
Finance, Vol. 44, No. 2; pp. 393 - 420.
http://www.iaeme.com/IJCIET/index.asp
588
editor@iaeme.com
Adler Haymans Manurung and Jenry Cardo Manurung
[14]
[15]
[16]
[17]
[18]
[19]
[20]
[21]
[22]
[23]
[24]
[25]
[26]
[27]
[28]
[29]
[30]
Fama, Eugene F (1981 ) Stock Return, Real Activity, Money and Inflation; American
Economic Review, pp. 545 - 565
Hamilton, J. D (1983); Oil and the Macroeconomy since World War II; Journal of Political
Economy, Vol. 91, No.2; pp. 228 - 248
Hutagaol, Y.; Siauw, F. and I. A. Ekaputra (2011); The Determinants of Management
Forecasts Error amd the IPO Underpricing: A Case Study of Indonesian IPO; Journal of
Applied Finance and Accounting, Vol. 3, No. 2; pp. 136 – 152.
Jones, Charles M. and Gautam Kaul (1996); Oil and Stock Markets; The Journal of
Finance, Vol. 51, No. 2, pp. 463-491
Juselius, K. (2006); The Cointegrated VAR Model: Methodology and Applications; Oxford
University Press.
Kaul, G. (1987); Stock Returns and Inflation: The Role of the Monetary Sector; Journal of
Financial Economics 18, pp. 253-276
Kilian, L and Cheolbeom Park (2009); The Impact of Oil Price Shocks on the U.S. Stock
Market; International Economic Review, Vol. 50, No. 4, pp. 1267-1287
Kling, John L. (1985); Oil Price Shocks and Stock Market Behavior; Journal of Portfolio
Management; Vol. 12, No. 1; pp. 34 -39.
Lintner, J (1965); The Valuation of Risk Assets and the Selection of Risky Investment in
Stock Portfolio and Capital Budgets; Review of Economics and Statistics, Vol. 47, pp. 13
– 47.
Manurung, Adler H.; Yuwono, E. and Indra Siswanti (2019); Behavior of Initial Return in
Indonesia Market; Journal of Applied Finance and Banking Vol. 9, Issue 4; forthcoming
Magyereh, A. (2004); Oil Price Shocks and Emerging Stock Markets: A Generalized VAR
Approach; International Journal of Applied Econometrics and Quantitative Studies. Vol.12(2004)
Mossin, Jan (1966); Equilibrium in a Capital Asset Market; Econometrica, Vol. 34, No. 4;
pp. 768 – 783.
Nelson, C. R (1976); Inflation and Rates of Return on Common Stocks; Journal of Finance,
Vol. 31, No. 2; pp. 471 - 483
Ross, Stephen A (1976); The Arbitrage Theory of Capital Asset Pricing; Journal of
Economic Theory, Vol. 13, pp. 341 – 360.
Setiobudi, M.; Warganegara, D. L. and Doni S. Warganegara (2011); Empirical
Investigation of the Underpricing Phenomena on IPOs in Privatization of the SOEs
Evidence from Indonesia; Journal of Applied Finance and Accounting, Vol. 3, No. 2; pp.
109 - 135
Sharpe, W. F. (1964); Capital Asset Prices: A Theory of Market Equilibrium Under
Condition of Risk; Journal of Finance, Vol. 19, No. 3; pp. 425 - 442
Sims, C. A. (1980); Macroeconomics and Reality; Econometrica, Vol. 48, No. 1; pp. 1 –
48
NOTES
(7) This research also did similar model using Regression by Ordinary Least Square (OLS),
and found that variable of Inflation, and oil price has significantly affected Underpricing
with level significant of 1
http://www.iaeme.com/IJCIET/index.asp
589
editor@iaeme.com