Article
Salam AL-DAWERI Muataz, ALBADA Ali, A. RAMADAN Rabie, LOW Soo-Wah, Al QATITI Khalid, Abbas Abbood ALBADR Musatafa
This study investigates the ex-ante information on initial public offering (IPO) underpricing in Malaysia using multiple machine learning techniques. The paper analyzes a sample of 350 fixed-price IPOs from 2004 to 2021, applying five machine learning models: artificial neural networks, random forest, gradient boosting, extra trees, and linear regression. The results indicate that random forests demonstrates superior performance, with a test $R^{2}$ of 0.2292, a CV $R^{2}$ mean of 0.529, and a CV $R^{2}$standard deviation of 0.1293, indicating moderate but reliable predictive power suitable for noisy financial data, such as IPO underpricing, where feature importance insights are more valuable than precise predictions. To reconcile and aggregate different outcomes from these multiple models, we implemented a voting algorithm to identify robust and reliable feature ranking for ex-ante determinants of IPO underpricing. Among the features, investor demand and divergence of opinions consistently emerged as the top two influential predictors of IPO underpricing, highlighting the key role investor sentiment and information asymmetry play in determining IPO pricing. These findings offer insights to investors, issuers, and policymakers, enabling a deeper understanding and effective management of the ex-ante drivers of underpricing in fixed-price IPOs, which lack market-based price discovery.