ANALYSIS OF UNDERPRICING DETERMINANTS

FACTORS ON THE PRIMARY PUBLIC OFFER

IN INDONESIA STOCK EXCHANGE

By:
Windaika Putri Wulandari

ABSTRACT

This study aims to analyze the determinants of underpricing in companies

that conduct Initial Public Offering (IPO) on the Indonesia Stock Exchange. The
research period is from 2016 to 2019. This research uses quantitative research,
because it refers to calculations in the form of numbers. The sampling technique
used purposive sampling, in order to obtain 46 sample companies in this study.
Data analysis used multiple regression models, to test the relationship between
the independent variable and the dependent variable.
Based on the results of data analysis, the Percentage of Shares Offered
has no effect on the Underpricing Level as evidenced by the regression coefficient
value of -0.369 at a significance value of 0.129, so the first hypothesis is rejected.
Company age has a negative and significant effect on the Underpricing Level as
evidenced by the regression coefficient value of -0.727 at a significance value of
0.005, so the second hypothesis is accepted. Company size has a negative and
significant effect on the Underpricing Level as evidenced by the regression
coefficient value of -10.346 at a significance value of 0.048, so the third
hypothesis is accepted. Retun On Asset has a negative and significant effect on
the Underpricing Level as evidenced by the regression coefficient value of -1.861
at a significance value of 0.007, so the fourth hypothesis is accepted.
Simultaneously the Percentage of Shares Offered, Company Age, Company Size
and Return on Assets to the Underpricing Level, this is evidenced by the
calculated F value of 8.759 at a significance value of 0.000. The multiple
regression equation in this study is formulated into:
IR = 182.499 - 0.369 PSD - 0.727 AGE - 10.346 SIZE - 1.861 ROA + e

Keywords: Underpricing, percentage of shares offered, company age, company

size, and Return On Assets (ROA)

PRELIMINARY
The company has various alternative sources of funding, both internal and
external. Funding from the company's retained earnings is a form of internal
funding. However, companies more often fund externally, by way of debt or by
issuing shares. Companies that sell their shares to the public are often known as
going public. In the process of going public, before being traded on the secondary
market (stock exchange), shares are first sold on the primary market. The initial
public offering through the primary market is known as the initial public offering
(IPO). The share price in the primary market is determined by the underwriter and
the issuer. Meanwhile, the stock price that will be reflected in the secondary

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market is determined by the market mechanism, according to the demand and
supply of shares.
Based on the two mechanisms for determining share prices, there is often a
price difference between the primary market and the secondary market. If the
price shown on the secondary market on the first day (closing price) is lower than
the price set in the primary market, this is called overpricing. Conversely, if the
share price shown in the secondary market on the first day is higher than the stock
price set in the primary market, this is called underpricing. The underpricing
phenomenon is a disadvantage for issuers, because the funds obtained during the
IPO are not optimal. There is a difference between the price realized in the
secondary market and the price that has been determined in the primary market,
that is the amount of losses incurred by the issuer. However, this is an advantage
for investors or often referred to as initial returns. With the underpricing
phenomenon, investors will have a high interest in a stock. The higher the
underpricing level, the higher the initial return expected by investors. In addition,
the phenomenon of underpricing can occur due to information asymmetry that can
occur between informed and uninformed investors (Rock, 1986).
In the Rock model, the informed investor knows more information about
the prospects of the listed company, so that the informed investor group only
participates in underpriced stocks which are indicated by an initial return. In order
for the uninformed investor group to participate in the initial offering, the issuer
will receive an underpriced price for its share offering. The existence of
information asymmetry has resulted in differences in stock prices in the primary
market and the secondary market, thus triggering the suspicion of some
researchers to further analyze the factors that affect underpricing as measured by
initial returns.
The main problems to be discussed in this study are: 1) How does the
percentage of shares offered affect the underpricing of initial public offerings on
the Indonesia Stock Exchange? 2) How does the age of the company affect the
underpricing of the initial public offering on the Indonesia Stock Exchange? 3)
How does company size affect the underpricing of initial public offerings on the
Indonesia Stock Exchange? 4) How does return on assets affect the underpricing
of the initial public offering on the Indonesia Stock Exchange?

LITERATURE REVIEW
Capital Market
The capital market is a meeting between parties who have excess funds
and parties who need funds by trading securities. Thus, the capital market can also
be interpreted as a market for trading securities which generally have a lifespan of
more than one year, such as stocks and bonds (Tandelilin, 2001).
The capital market can also function as an intermediary institution
(intermediaries). This function shows the important role of the capital market in
supporting the economy because the capital market can connect parties who need
funds with those who have excess funds. In addition, the capital market can
encourage the creation of an efficient allocation of funds, because with the capital
market, those who are excess funds (investors) can choose investment alternatives
that provide the most optimal returns.

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 According to Tandelilin (2001), the funds obtained by companies through
the sale of securities (shares) are the result of trading company shares carried out
in the primary market. It is in this primary market that the company sells its
securities for the first time, and the process is called an Initial Public Offering
(IPO) or a public offering.
Go Public Process
Going Public or public offering is an activity carried out by issuers to sell
securities to the public, based on the procedures regulated by law and their
implementation (Tandelilin, 2001). Based on the advantages for companies that
go public, namely: 1) Diversification, 2) Increasing liquidity, 3) As a means to
increase company capital, 4) Determining company value.
Companies that need funds can sell their securities on the capital market or
go public. The sale of securities or shares made for the first time offered to the
public is called an initial public offering (IPO). The funds obtained by the issuer
when conducting an IPO is the amount of the share price in the primary market
multiplied by the number of shares offered to the public. Initial public offering is
carried out in the primary market, after which it is only traded on the secondary
market.
Underpricing
Underpricing is the difference between the initial price at which the
company's shares are offered and the closing price of the shares on the first
trading day (Daily et al, 2003). The price sold in the primary market is determined
based on an agreement between the issuer and the underwriter. Meanwhile, the
realized price in the secondary market is formed from the market mechanism
according to the demand and supply of shares.
The underpricing that occurs will be detrimental to the issuer because the
funds obtained during the IPO are not maximal. However, these losses will be an
advantage for investors, because they get an initial return. That way, the
underpricing will attract investors to participate in the primary market. To reduce
the uncertainty that occurs in the IPO process, the issuer will issue a company
prospectus that aims to reduce information asymmetry. This prospectus contains
financial and non-financial data regarding the company. Prospectus is a document
containing information about the securities issuing company and other
information relating to the securities being offered (Hartono, 2003).
Underpricing occurs because of the information asymmetry that will affect
the share price of the initial offering lower than the market price in the secondary
market. Underwriters have better information about the capital market, while the
issuer is the party who does not have information about the capital market so that
if they do not have complete information, there will be price differences.
Signaling Theory reveals that the actions of the company in its initial public
offering of shares give signals to the market in the form of positive signals or
negative signals for investors. Equally important is the attitude and response of
investors who are the funders of the initial public offering. Investors' decisions or
responses are of course based on their knowledge and observations of available
information.
Percentage of Shares Offered to the Public
The percentage of shares offered to the public is seen from the number of
shares offered at the IPO. The percentage of shares offered by the company will

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affect the amount of information on the market. According to Dita (2013), the
proportion of shares that are retained from old shareholders (issuers) can indicate
a flow of information from the issuer to potential investors. The greater the
proportion of shares held by old shareholders (issuers) the more private
information (openness) the old shareholders will have.
Entrepreneurs (before going public) will continue to invest capital in their
companies if they are sure of future prospects. The owner will not invest his
capital in another company if the investment in the company is better (Leland &
Phyle) in Yasa (2008). Information on the level of share ownership by
entrepreneurs will be used by investors as a sign that the company's prospects are
good (Yasa, 2008). The higher the number of shares held by the old owner (the
lower the number of shares to be offered) indicates that the performance and
prospects of the company are in good shape. This will reduce the level of
uncertainty in the future, thus reducing the possibility of underpricing.

RESEARCH METHODS
This research is a type of quantitative data, namely data that can be input
into a statistical measurement scale. The object used in this study is a company
that made an initial public offering (IPO) when going public and listed on the
Indonesia Stock Exchange. With the criteria for an underpricing company, namely
companies whose share offering price at the time of the IPO was lower than the
price at closing on the secondary market on the first day. The population in this
study were companies that made their first IPO from 2016 to 2019 on the
Indonesia Stock Exchange. The sampling technique used was purposive sampling
by selecting data according to the needs for research and supported by complete
data.
The research was conducted by taking secondary data on companies that
made initial public offerings for the 2016-2019 period from the IDX website
(www.idx.go.id). Data collection is planned for April 2016 to July 2016. The data
used in this research is secondary data, where the data obtained is in finished form
and has been processed by other parties. Techniques in data collection are carried
out by literature and documentation. Literature study is carried out by studying
articles, journals, and previous research on the discussion literature that is suitable
for the research. Meanwhile, documentation is done by collecting the required
data, followed by recording and calculation. It can be obtained from the Indonesia
Stock Exchange, or can be accessed through www.idx.co.id.
The analysis technique used in this research is regression analysis, because
it can explain how much influence the dependent variable has with the
independent variable, either partially or simultaneously. The analysis used to test
the hypothesis is multiple regression, which is to test the strength of the
relationship between the dependent variable and the independent variable, using a
significance level of 5%. In multiple regression calculations, the variables used
must meet the classical assumptions so that the analysis carried out is reliable.

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RESEARCH RESULTS AND DISCUSSION
1. Effect of Percentage of Shares Offered on Underpricing Level
The statistical results of the t test for the Underwriter's Reputation
variable obtained a significance value of 0.129 which is greater than the error
tolerance α = 0.05. Therefore the significance value is greater than 0.05 and
the regression coefficient is negative at -0.369; means this research has not
been able to prove the first hypothesis which states "Percentage of Shares
Offered has a positive effect on the Level of Underpricing". This insignificant
result can be caused by the relatively small percentage of shares offered to the
public, namely less than 50%.
This is indicated by the mean average value of the percentage of
shares offered in the descriptive statistics of 22.7044. The results of this study
are not in line with research conducted by Lestari (2015) entitled "Analysis of
Factors Affecting the Underpricing of Shares at the Initial Public Offering on
the IDX 2012-2014". The results of his research state that the Percentage of
Shares Offered has a significant positive effect on the Underpricing variable.
2. The Effect of Company Age on the Level of Underpricing
The statistical results of the t test for the company age variable
obtained a significance value of 0.005 which is smaller than the error
tolerance α = 0.05. Therefore the significance value is less than 0.05 and the
regression coefficient is negative at -0.727; This means that this research is
able to prove the second hypothesis which states "Company Size has a
negative effect on the Underpricing Level".
The results of this study indicate that the age of the company has an
effect on the level of underpricing, meaning that the length of time the
company stands makes it easier for investors to find information about the
company. The higher the age of the company, the more information the
public will get about the company because one of the causes of underpricing
is the theoretical asymmetry between investors and asymmetry. The higher
the age of the company, the lower the level of business risk of the company in
the future. This can attract investors because it is believed that a company that
has been established for a long time can be said to be more experienced in
generating returns for the company which in turn has an impact on increasing
returns received by investors in the long term.
The results of this study are in line with the research conducted by
Hapsari and Mahfud (2012), entitled "Analysis of Factors Affecting Stock
Underpricing at Initial Public Offering on the IDX 2008-2010 Period". The
results of his research state that company age has a negative and significant
effect on the level of underpricing.
3. The Effect of Company Size on the Level of Underpricing
The statistical results of the t test for the firm size variable obtained a
significance value of 0.048 which is smaller than the error tolerance α = 0.05.
Therefore the significance value is less than 0.05 and the regression
coefficient is negative at -10.346; This means that this research is able to
prove the third hypothesis which states "Company size has a negative effect
on the Underpricing Level".
The results of this study indicate that the size of the company as seen
from the total asset value of a company is calculated by investors in

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 calculating the initial return. The amount of total assets owned by the
company is a guarantee that the company has great growth prospects in the
future. It is possible that a small company is able to develop faster than an
existing large company, so that it is able to generate large returns in a
relatively short period of time. In fact, investors judge a company from the
value of its total assets, and from the company's operational performance. Is
this performance able to make the company grow, as well as promising great
opportunities for investors on the returns obtained and profits in the future.
The results of this study are in line with the research of Hapsari and
Mahfud (2012), entitled "Analysis of Factors Affecting the Underpricing of
Shares at the Initial Public Offering on the IDX 2008-2010 Period". The
results of his research state that firm size has a negative and significant effect
on the level of underpricing.
4. The effect of Return On Assets (ROA) on the level of underpricing
The statistical results of the t test for the firm size variable obtained a
significance value of 0.007 which is smaller than the error tolerance α = 0.05.
Therefore the significance value is less than 0.05 and the regression
coefficient is negative at -1.861; This means that this research is able to prove
the fourth hypothesis which states that "Return On Assets has a negative
effect on the Underpricing Level".
The results of this study indicate that the effectiveness of the company
in generating profits by utilizing its assets is measured by the return on assets.
Companies that can generate greater profits, their shares will be requested by
investors. The greater the profit that can be generated, the greater the
allocation of funds for shareholders (investors). Thus, investors will apply the
shares they bought on the primary market at a high price and then sell them
on the stock exchange at a high price. For investors, this information can be
useful in investing their funds in listed companies because they are
considered to have high profitability. So high profitability will reduce
uncertainty for investors so that it will reduce the level of underpricing.
The results of this study are not in line with the research conducted by
Handayani and Shaferi (2011), with the title "Analysis of Factors Affecting
Underpricing of Initial Public Offerings (a case study on financial companies
that go public on the JSE 2000-2006 period". states that Return On Assets has
no significant effect on the Underpricing Level.

CONCLUSION
Based on the data that has been analyzed and the results obtained, the
conclusions of this study are:
1. The Percentage of Shares Offered Variable has no significant effect on the
level of underpricing. This is indicated by the value of the regression
coefficient obtained at -0.369 and a significance of 0.129.
2. The company age variable has a negative and significant effect on the level of
underpricing. This is indicated by the value of the regression coefficient
obtained at -0.727 and a significance of 0.005.
3. The firm size variable has a negative and significant effect on the
underpricing level. This is indicated by the value of the regression coefficient
obtained at -10.346 and a significance of 0.048.

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4. The variable Return On Asset (ROA) has a negative and significant effect on
the level of underpricing. This is indicated by the value of the regression
coefficient obtained at -1.861 and a significance of 0.007.
5. Percentage of Shares Offered, Company Age, Company Size and Return On
Assets (ROA) simultaneously affect the level of underpricing, this is
evidenced by the calculated F value of 8.759 and a significance of 0.000. It
can be seen that the significance value is smaller than 0.05, so that Ha is
accepted and H0 is rejected.
6. The results of the Adjusted R2 test in this study were obtained at 0.408. This
shows that the level of Underpricing (IR) is influenced by the Percentage of
Shares Offered (PSD), Company Age (AGE), Company Size (SIZE), and
Return On Assets (ROA) of 40.8% while the remaining 59.2% influenced by
other factors not examined in this study.

REFERENCES
Daily, Catherine M., S. Trevis Cetro, Dan R. Dalton & Rungpen Roengpitya.
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Dita, Charisma. 2013. Determinants of Company's Shares Performance After

Initial Public Offering. Journal of Management Science. Vol. 1 No. 1.

Handayani and Shaferi 2011. Analysis of Factors Affecting Underpricing of

Initial Public Offering (Case Study on Financial Companies Going Public
on the JSE 2000-2006 Period.

Hapsari and M. Kholid Mahfud. 2012. Analysis of the Factors Affecting the
Underpricing of Shares in the Initial Public Offering on the IDX 2008-
2010 Period. Journal of Management. Vol. 1 No. 1. Pages 1-9.

Hartono, Jogiyanto. 2003. Portfolio Theory and Investment Analysis. Yogyakarta:

BPFE-Yogyakarta.

Lestari, Anggelia Hayu, et al. 2015. Analysis of the Factors Affecting the
Underpricing of Shares in the Initial Public Offering on the IDX 2012-
2014. Journal of Business Administration (JAB). Vol. 25 No. 1.

Rock, Kevin. 1986. Why New Issues Underpriced. Journal of Financial

Economics. No. 34.

Tandelilin, Eduardus. 2001. Investment Analysis and Portfolio Management.

Yogyakarta: BPFE-Yogyakarta.

Yasa, Gerianta Wirawan. 2008. Causes of Underpricing in Initial Public Offering

on the Indonesia Stock Exchange. Journal of Accounting and Business.
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www.idx.co.id.