Shariah-compliant status and investors demand for IPOs: the moderating role of regulatory quality
| Date | 08 June 2023 |
| Pages | 314-331 |
| DOI | https://doi.org/10.1108/JMLC-03-2023-0059 |
| Published date | 08 June 2023 |
| Author | Waqas Mehmood,Anis Ali,Rasidah Mohd-Rashid,Attia Aman-Ullah |
Shariah-compliant status and
investors demand for IPOs:
the moderating role of
regulatory quality
Waqas Mehmood
School of Accounting and Finance, Faculty of Business and Law,
Taylor’s University, Subang Jaya, Malaysia
Anis Ali
Department of Management, College of Business Administration,
Prince Sattam bin Abdulaziz University, Al Kharj, Saudi Arabia
Rasidah Mohd-Rashid
School of Economics, Finance and Banking, Universiti Utara Malaysia,
Sintok, Malaysia, and
Attia Aman-Ullah
Faculty of Management Sciences, Preston University –Islamabad Campus,
Islamabad, Pakistan
Abstract
Purpose –The purpose of this study is to look at how Shariah-compliant status and Shariah regulation
affect the demand for initial publicofferings (IPOs) in Pakistan. The Shariah-compliant status, whichis seen
as a method that offers a crediblesignal to investors, may explain the anomaly in IPO demand.
Design/methodology/approach –This research used multivariate and quantile regression models to
assess datafrom 85 IPOs issued on the Pakistan Stock Exchange between2000 and 2019.
Findings –Shariah-compliant status has a considerable negative association with IPO demand.
Nevertheless, there is a considerable positive association among Shariahregulation and IPO demand.
Furthermore, the interaction among regulatory quality and Shariah-compliant status has a considerable
strong influence on IPO demand. As a consequence, the findingsshow that Shariah-compliant firms might
possibly attractthe attention of investors. Investors were found to concur on the amicabilityof rigorous rules
and permissibleShariah-compliance aspects.
Research limitations/implications –Future studiescould analyse the financial ratio benchmark (cash
and debt) to determinethe Shariah-compliant status and Shariah regulation to betterunderstand the problem
of IPO demand in the contextof Pakistan.
Practical implications –The outcomes of this research are useful for issuers and underwriters in
comprehending the characteristics that influence high and early IPO success. Such knowledge may assist
issuersand underwriters in responsibly planning and managing the IPO process.
Social implications –The results may be useful to investors looking for critical information in
prospectusesto make the best choice when subscribingto IPOs in Pakistan.
JEL classification –G18, G38, K20
This study is supported via funding from Prince Sattam Bin Abdulaziz University (Project No.:
PSAU/2023/R/1444).
JMLC
27,2
314
Journalof Money Laundering
Control
Vol.27 No. 2, 2024
pp. 314-331
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-03-2023-0059
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1368-5201.htm
Originality/value –This is one of the first studies to provide empirical data on the links among Shariah-
compliant status, Shariah regulationand IPO demand in Pakistan. Furthermore, this research demonstrates
the interactionimpact of regulatory quality and Shariah-compliantstatus on IPO demand.
Keywords Shariah-compliant regulation, IPO’s demand, Pakistan stock exchange
Paper type Research paper
1. Introduction
The Pakistan Stock Exchange (PSX) is typically characterised by investor sentiments and
speculative behaviours (Mehmood et al., 2020a,2020b,2020c, 2020d). PSX recorded its
highest number of initial public offerings (IPOs) throughout 1992–1998, with an average of
35 IPO listings annually. After spending nearly, a decade in the frontier market, Pakistan
reverted to the Morgan Stanley Capital International (MSCI) emerging index in 2017. The
country seemed to be on the right growth track as an emerging market, but numerous
sanctions were enforced on Pakistan following the country’s May 1998 nuclear tests. No
IPOs were offered in 1999 (Pakistan Stock Exchange-Flotation, 1999), and there were
contractions to the general growth of IPOs. A total of 85 IPOs were offered between 2000
and 2017, with an annual average of only five IPOs. This scenario suggests the presence of
high market uncertainties caused by information asymmetry and political instability
(Mehmood et al., 2020a,2020b,2020c,2020d).
Most of the IPOs issued in the Pakistani market pre-2009 were highly oversubscribed.
IPOs offered via the fixed-price mechanism are indicated as being exposed to high
information asymmetry due to thefailure to capture the true value of investor participation
(Mehmood et al., 2020a). The Thailand and Singaporeanmarkets, for example, use the fixed-
price mechanism for IPOs and both countries face the scenario of high investor demands.
Chowdhry and Sherma (1996) also reported highlevels of IPO’s demand in Asian countries
and the UK caused by information leakage and huge allocations of shares to institutional
investors. Similarly, the high levels of IPOs demand in the Pakistani market are caused by
information leakagebetween the offer date and the closing date for bidding.
The IPO’s demand, or the frequency of issuance subscription, measures an IPO’s
performance. Low and Yong (2011) used the terms “investor demand”and “subscription
rate”synonymously and suggestedthat IPO’s demand indicates IPO success, whilst under-
subscription indicates failure. A subscriptionrate higher than 1 indicates oversubscription,
equal to 1 indicates full subscription and lower than 1 indicates under-subscription. Thus,
an issuance is deemed oversubscribedwhen its overall share demand is greater than the
share supply available in the market. On the otherhand, it isdeemed undersubscribed when
the overall share demand is lower than the number of shares floated by the issuing firm.
Hence, investor demand is crucial in determining IPO success, especially for a company
whose future in the capitalmarket is dependent on its capability to attract investors.
The Islamic finance industry and the Islamic stock markets have shown an average
growth of 17.5% since the 2008 global financial crisis (Hussain et al.,2016). Shariah-
compliant assets recorded a global volume of US$1,984bn throughout 2007–2014, with an
annual growth rate of 16%. These assets are projected to grow further to exceed US$5tn.
This remarkable asset growth demonstrates the potential of the Islamic financial system
that warrants more in-depth examinations. Such potentiality is further reinforced by the
growing customer base to the tune of billions and the global expansion of the Islamic
banking and finance industry. As such,Shariah scholars have developed Shariah screening
criteria to tackle investment-relatedissues concerning marketable equities that are mainly
driven by the profit and loss sharing principle. There are a number of Islamic indexes
Regulatory
quality
315
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