An initial public offering (IPO) allows a company to raise a large amount of money from public investors. The main motive for the IPO would be for the issuer to use the proceeds raised from the IPO for investments, debt repayment, or working capital purposes. In the Malaysian market, issuers are required to disclose their intended use of the IPO proceeds in their prospectus to assist potential investors in making their decision.  However, the Securities Commission does not require the issuer to specify the amount to be allocated to each intended use of the proceeds. Thus, issuers have the latitude of the amount to be allocated to the areas in which they plan to use their IPO funds.

The main purpose of this study was to examine whether the intended use of the IPO proceeds as disclosed in the prospectus plays a role in explaining the underpricing phenomenon in the Malaysian IPO market. Underpricing or positive initial returns occur when a company offers its shares at a price lower than the closing price on its first day of trading. We used a sample of 208 IPOs listed on the Bursa Malaysia from 2005 to 2015 to examine the effect of disclosing the amount of the IPO proceeds' intended use on underpricing. The intended use of IPO proceeds was classified into three areas: growth opportunities, debt repayment, and working capital. We anticipate that each of these intended use may likely influence the investors’ perception of the valuation and performance of the company.

We found that the intended use of the IPO proceeds for growth opportunities and working capital have a positive relationship with IPO underpricing. In contrast, debt repayment is negatively associated with IPO underpricing. This suggests that the two intended uses provide information on the role of the use of IPO proceeds in explaining IPO underpricing. Thus, disclosure of the intended use of IPO proceeds provides information about the uncertainty surrounding the future cash flows of IPO and the growth strategy. When the intended use of IPO proceeds for growth opportunities is further expanded into capital expenditure (CAPEX) and research and development (R&D), the intended use of IPO proceeds for CAPEX increases IPO underpricing, whereas the intended use of IPO proceeds for R&D reduces IPO underpricing.

Findings suggest that the intended use of the IPO proceeds provides useful information about the underpricing phenomenon. Investors can use this information to understand the purpose of the IPO and the company’s prospects. In addition, regulatory authorities should pay close attention to the amount allocated to each intended use of the IPO proceeds as this may play a critical role in the success of the company. Our study provides new empirical evidence on the motivations of IPOs and the usefulness of the intended use of the IPO proceeds in explaining IPO underpricing. By implication, offering IPO shares requires the issuers to make a reasonable allocation to the intended use of IPO proceeds for growth opportunities to make it attractive to investors. Potential investors can also look at the intended use of the IPO proceeds as a screening criterion to determine the quality of a company. Similarly, the government should consider that issuers dedicate a larger percentage of their IPO proceeds for growth opportunities as this is instrumental for the country to achieve Industry4.0. In sum, the results provide insight to prospective IPO companies on the value relevance of information pertaining to the efficient uses of IPO proceeds.u