The Influence of Underwriter and Auditor Reputations on IPO Under-pricing

Abstract

Companies considering initiating public offerings (IPO) expect to raise funds and would like to maximize their initial return. The asymmetry of information between parties involved in initial public offerings often jeopardizes potential investors’ involvement. Besides the financial factors, the reputations of the underwriters and auditors have a significant impact on the initial return of shares. This paper aims to investigate and measure the influence of underwriter and auditor reputation on under-pricing of share prices. The findings show that the higher the reputation, the lower is the initial return of shares, thus there is a higher level of undervaluation. The samples used are companies listed in the Indonesia Stock Exchange (IDX) during the period of 2004-2009.   This study could contribute to academics’, companies’ and investors’ knowledge about the impact of non-financial factors on share prices during initial public offerings.

Key Words: Underwriter Reputation, Auditor Reputation, Initial Public Offering, Under-pricing, Undervaluation