Explaining long run abnormal return for IPO stocks listed at the Indonesian Stock Exchange Composite : a liquidity analysis between 2008 and 2013

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Explaining!long!run!abnormal!return!for!IPO!stocks!

listed!at!the!Indonesian!Stock!Exchange!Composite:!a!

liquidity!analysis!between!2008!and!2013!

This! paper! investigates! the! causal! relation! of! liquidity! on! abnormal! return! for! firms!that!go!IPO!on!the!Indonesian!Stock!Exchange!Composite.!The!first!result!is! that! abnormal! return! does! exist! for! IPO! firms! on! the! IDX! between! 2008! and! 2013.! This! result! is! robust! for! the! Fama! French! threeVfactor! model! and! the! market!model!for!expected!return.!Secondly,!the!study!shows!that!liquidity!has!a! significant! impact! on! abnormal! return.! Liquidity! is! measured! as! the! bidVask! spread!and!price!sensitivity.!Even!in!sub!periods,!these!measures!are!significant! with! the! same! sign! of! causality! and! therefore! these! measures! are! robust.! Although! the! measures! are! significant,! the! explanatory! power! of! the! model! is! very! low.! This! implicates! that! future! research! should! be! focused! on! extending! the!factors!in!explaining!abnormal!return!in!Indonesia.!

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Keywords:!Liquidity,!Abnormal!return,!IPO,!Indonesia,!IDX,!Emerging!market!

INDEX) ! Abstract) 1.)Introduction! ! ! ! ! ! ! ! ! 3! 2.)Literature)&)Hypotheses! ! ! ! ! ! ! 4! 3.)Methodology)&)Data! ! ! ! ! ! ! ! 6! ! 3.1.,Methodology! ! ! ! ! ! ! ! 6! ! 3.2.,Data! ! ! ! ! ! ! ! ! 10! 4.)Empirical)results!! ! ! ! ! ! ! ! 12! ! 4.1.,Abnormal,return!! ! ! ! ! ! ! 12! ! 4.2.,Endogeneity! ! ! ! ! ! ! ! 13! ! 4.3.,Liquidity! ! ! ! ! ! ! ! ! 15! 5.)Conclusion! ! ! ! ! ! ! ! ! 18! References! ! ! ! ! ! ! ! ! ! 20! ! !

1.)Introduction)

Since! September! 2007,! the! Indonesian! Stock! Exchange! (IDX)! merged! from! the! Jakarta! Stock! Exchange!and!the!Surabaya!Stock!Exchange.!Little!research!has!yet!been!done!to!IPO!firms!in! general!in!Indonesia.!How!do!variables!that!influence!abnormal!return!in!developed!countries! hold!in!emerging!countries!is!especially!important.!For!IPO!firms,!they!can!anticipate!to!these! characteristics!any!match!them!with!their!strategies.!Especially!since!the!IDX!has!the!mission! to! become! the! largest! stock! exchange! in! South! Asia! (World! Federation! of! Exchanges,! 2013)! measured!by!market!capital,!it!is!assumable!that!the!exchange!will!attract!new!firms!and!will! move!from!an!emerging!market!to!a!more!and!more!developed!country.!To!be!attractive!for! new!firms,!it!is!necessary!for!firms!to!understand!the!underlying!factors!that!influence!stock! price!behavior!in!Indonesia.!

! The!increasing!number!of!yearly!IPO’s!(Indonesia!Stock!Exchange,!2013)!demands!for!a! scientific! explanation! of! stock! price! behavior! in! emerging! markets.! Pastor! and! Stambaugh! (2003)!prove!that!liquidity!influences!asset!pricing!in!developed!markets,!same!as!the!paper!of! Fang,!Noe,!and!Tice!(2009).!While!foreign!holdings!are!of!importance!as!explanatory!variable! for! liquidity! (Rhee,! &! Wang,! 2009),! liquidity! has! not! been! researched! in! recent! literature! as! explanatory!variable!for!stock!price!return!in!Indonesia.!Specifically!IPO!firms!experience!more! frequently!abnormal!return!than!other!firms!(Ritter,!&!Welch,!2002).!

! The!gap!in!literature!about!liquidity!and!the!not!yet!explained!abnormal!return!for!IPO! firms!in!Indonesia!are!interesting!and!this!paper!aims!to!make!these!gaps!smaller!by!focusing! on!the!question!if!IPO!firms!in!Indonesia!experience!abnormal!return!and,!if!so,!if!this!abnormal! return! can! be! explained! by! liquidity.! With! these! questions! answered,! firms! have! a! better! understanding! about! which! factors! are! of! influence! to! stock! price! behavior! and! adapt! their! shareholder!strategy.!

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Chapter!2!contains!the!relevant!literature!that!will!outline!this!research.!The!way!this!research! is!conducted!is!described!in!detail!in!chapter!3.!Here,!the!methodology!and!which!databases! are! consulted! are! explained.! This! chapter! is! the! foundation! of! the! actual! analyses,! which! are! shown! in! chapter! 4.! The! hypotheses! are! tested! in! this! chapter! while! chapter! 5! contains! the! interpretation!of!the!analyses!done!in!chapter!4.!Finally,!a!suggestion!for!further!research!will! be!made!in!chapter!5.!

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2.)Literature)&)hypotheses)

Prior!research!has!been!done!to!the!effect!of!liquidity!on!stock!price!volatility!(Lesmond,!2005),! (Bekaert! &! Harvey,! 1997).! Lesmond! (2005)! did! his! research! on! stocks! in! 23! emerging! countries! between! 1993! and! 2001! and! find! that! liquidity,! he! uses! the! LOTVmeasure,! has! significant! impact! on! price! volatility.! The! LOT! measure! is! calculated! by! subtracting! the! first! period! log! likelihood! function! of! the! estimated! market! model! from! the! second! period! log! likelihood! function.! This! measure! incorporates! the! cost! of! trading! as! well.! Bekaert! &! Harvey! (1997)!find!a!similar!result!for!impact!on!price!volatility!in!19!emerging!markets!between!1978! and!1991!spanning!multiple!continents.!For!less!open!economies!(in!terms!of!world!trade)!they! find!that!local!factors!are!influential!for!volatility.! ! In!2003,!Bekaert!and!Harvey!focused!more!on!return!instead!of!price!volatility!in!most! of!the!same!countries!they!researched!in!their!1997!paper.!The!main!goal!of!their!research!is!to! study!the!effect!of!capital!market!liberalization!on!economic!performance.!One!of!their!results! is! that! liberalization! of! the! capital! market! improves! liquidity! (bidVask! spread)! and! enhances! capital!inflow,!which!on!their!turn!increases!expected!return.!

! Pastor! and! Stambaugh! (2003)! find! a! similar! effect! for! liquidity! on! asset! pricing.! Adjusted! for! market! premium,! size,! value! and! momentum! factors,! their! main! result! is! that! stocks!that!are!highly!sensitive!for!liquidity,!which!is!an!average!of!multiple!common!liquidity! measures,! have! a! 7,5%! higher! average! return! then! low! sensitive! stocks.! This! is! an! average! return!measured!over!34!years!in!developed!countries.!

! In!literature!different!proxies!are!used!to!measure!liquidity.!Fang,!Noe!and!Tice!(2009)! use! relative! effective! spread! as! the! measure! for! liquidity.! In! their! perspective! and! that! of! Statman,!Thorley!and!Vorkink!(2006),!the!relative!effective!spread!is!the!best!liquidity!measure! since!it!uses!high!frequency!trading!variables!and!it!proves!that!high!return!causes!additional! trading!activity.!This!relative!effective!spread!is!measured!by!the!difference!between!execution! price!and!the!midpoint!of!the!bidVask!spread!for!every!intraday!trade.!The!paper!of!Fang,!Noe! and!Tice!(2009)!uses!data!of!firms!listed!on!the!NYSE.!

! For! this! paper,! a! more! interesting! research! about! liquidity! in! Indonesia! has! been! written!by!Rhee!and!Wang!(2009).!They!define!liquidity!into!three!different!measures:!bidVask! spread,!depth!of!a!stock!and!price!volatility.!Though!their!research!does!not!focus!on!explaining! stock! performance,! these! measures! provide! a! more! detailed! view! on! liquidity! for! emerging! markets.!It!is,!for!example,!not!uncommon!for!firms!listed!at!the!IDX!that,!at!a!certain!day,!their! stock! is! not! traded! while! there! is! a! bidVask! spread.! As! result,! the! relative! effective! spread!

proposed!by!Fang,!Noe!and!Tice!(2009)!cannot!be!measured!on!these!days!since!it!requires!an! execution!price,!with!many!missing!values!will!be!reported.!The!obtained!dataset!for!this!paper! provides!enough!information!to!calculate!the!bidVask!spread!and!price!sensitivity!of!the!stock! on!a!daily!basis;!it!does!not!provide!data!to!calculate!the!depth!of!the!stock.!This!data!is!not! freely!obtainable!through!available!resources.! ! Important!for!this!paper!is!the!proof!of!abnormal!return.!In!previous!literature!it!has!not! yet! been! proven! that! stocks! listed! on! the! IDX! experience! abnormal! returns! when! expected! return!is!measured!according!to!the!Fama!French!threeVfactor!model!(Fama!&!French,!1993).! This!threeVfactor!model!uses!timeVvarying!factors!for!value!and!size!of!firms.!Subtracting!the! highest! 20%! market! value! firms! from! the! lowest! 20%! firms! forms! the! monthly! size! factor! monthly.! The! value! factor! is! formed! monthly! by! subtracting! the! lowest! 20%! bookVtoVmarket! value!firms!from!the!highest!20%!firms.!Therefore,!the!Fama!French!model!corrects!for!market! value!and!bookVtoVmarket!value!when!calculating!expected!return.!

! Expected! return! can! be! measured! through! various! models! such! as! the! market! model,! the!Fama!French!threeVfactor!model!and!the!Carhart!fourVfactor!model.!The!Carhart!model!is! an!extension!of!the!Fama!French!model,!which!on!its!turns!is!an!extension!of!the!market!model.! In! his! paper,! Carhart! (1997)! proofs! that! his! additional! factor! to! the! Fama! French! model! ‘momentum’!is!significantly!different!from!zero!in!a!developed!market.!

! Since! the! IDX! is! established! in! September! 2007! and! with! the! first! IPO! on! March! 5th,! 2008! (Indonesia! Stock! Exchange,! 2013),! the! exchange! does! not! have! a! good! track! record! to! measure!the!fourth!factor!of!Carhart!since!at!least!12!months!of!historical!data!is!needed.!For! the!first!12!companies!to!go!IPO!on!the!IDX,!the!momentum!factor!is!not!available.!The!other! three!factors!of!the!model!do!give!a!more!precise!measurement!of!expected!return.!Data!is!not! available! to! calculate! the! smallVminusVbig! (SMB)! and! highVminusVlow! (HML)! factors! for! Indonesia! specific,! but! Kenneth! French! provides! a! list! of! factors! for! different! region’s! in! the! world! on! his! website! (French,! 2013).! Though! Indonesia! does! not! appear! on! his! website,! the! region! Asia! Pacific! exist! which! includes! Australia,! Hong! Kong,! Singapore! and! New! Zealand.! These! developed! countries! have! different! factors! but! these! are! the! closest! Kenneth! French! provides.!!

! When!expected!return!equals!actual!return!on!average,!liquidity!plays!no!role!in!asset! pricing!in!Indonesia!between!2007!and!2013.!Though!it!is!likely!that!emerging!market!stocks! have!excess!return!(Henry,!2000),!this!paper!will!first!prove!the!existence!or!absence!of!such! return.!

! For! an! emerging! market! there! are! important! factors! influencing! liquidity.! Foreign! holdings!is!the!most!important!factor!in!the!paper!of!Rhee!and!Wang!(2009).!Foreign!holdings! are! strategic! positions! (>5%)! by! foreign! institutional! investors.! The! rate! is! measured! as! a! percentage! of! the! freeVfloat! rate,! which! will! be! explained! further! in! chapter! 3.! While! the! common! view! is! that! foreign! investors! improve! market! wide! liquidity! (Bekaert! &! Harvey,! 2003),! Rhee! and! Wang! (2009)! challenge! this! view! by! providing! evidence! that! increasing! foreign!holdings!has!a!negative!future!effect!on!liquidity.!The!economic!reason!is!not!clear!for! this!result!but!they!provide!the!argument!that!reduced!competition!in!liquidity!supply,!due!to! the! presence! of! large! dominant! traders,! is! a! mechanism! that! can! cause! this! effect.! Inactive! trading! because! of! a! buyVandVhold! strategy! of! large! foreign! investors! might! be! a! plausible! mechanism!as!well!(Rhee,!&!Wang,!2009).!This!buyVandVhold!strategy!implies!that!investors!do! not! weigh! their! portfolio! every! month.! Instead,! they! hold! their! shares! for! a! longer! period! of! time.!

! A! factor! that! is! likely! to! influence! stock! return! for! IPO! firms! is! first! day! underpricing!! (Carter,! Dark,! &! Singh,! 1998),! (Fan,! Wong,! &! Zhang,! 2007).! The! size! of! the! underpricing! can! ‘echo’!in!the!long!run!and!actual!return!is!adjusted!in!accordance!to!meet!the!expected!return.! ! Another! factor! from! the! paper! of! Rhee! and! Wang! (2009)! is! the! freeVfloat! rate.! In! developed!markets!it!is!considered!that!the!freeVfloat!market!value!nearly!equals!market!value! of!all!shares!outstanding!on!average.!This!is!not!necessarily!the!same!for!developing!countries! (Rhee!&!Wang,!2009).! ! Following!the!literature!in!this!chapter!the!hypotheses!to!be!tested!in!this!paper!are:! Hypothesis)1!! IPO!firms!in!Indonesia!experience!longVrun!positive!or!negative!abnormal! ! ! ! returns! Hypothesis)2.1! Liquidity!spread!influences!firm!performance! Hypothesis)2.2! Liquidity!volatility!influences!firm!performance! ! 3.)Methodology)&)data)) 3.1,Methodology, First!it!is!important!to!establish!whether!stocks!listed!on!the!IDX!experience!abnormal!returns.! Abnormal! return! is! the! difference! between! actual! return! for! each! firm! and! expected! return.! The!Fama!French!threeVfactor!model!as!discussed!in!chapter!2!will!calculate!expected!return.! Next,!for!robustness,!the!market!model!will!be!calculated!as!well.!!

Fama)French)model!! !!"− !!" = ! + !!!! !!" − !!" +!!!!!!"#!+ !!!!!"#!+ !!"! Market)model! ! !_!"− !_!" = ! + !_!!! _! !"− !!" + !!"! ! ! In!both!models,!the!IDX!will!serve!as!benchmark!for!the!IPO!stocks.!This!benchmark!will! not!be!adjusted!for!the!weights!of!the!stock!itself!since!it!is!compiled!from!433!companies!as!of! the! end! of! 2013! (Indonesia! Stock! Exchange,! 2013).! The! impact! of! the! movement! of! the! individual!stock!price!is!marginal!small!so!the!benchmark!is!not!adjusted.!If!abnormal!return! exists,!both!alphas!should!be!significantly!unequal!to!zero.!

! The!Indonesia!Stock!Exchange!Composite!is!used!as!benchmark!for!market!return.!Data! to! calculate! the! two! remaining! factors! of! the! threeVfactor! model:! smallVminusVbig! and! highV minusVlow!are!not!properly!available.!Therefore,!factors!specific!for!the!developed!AsiaVPacific! region! are! used! from! the! website! from! Kenneth! French! (French,! 2013).! The! developed! Asia! Pacific!region!consists!of!Hong!Kong,!Singapore,!Australia!and!New!Zealand.!These!factors!are! monthly! calculated! between! January! 2008! and! December! 2013.! This! is! not! most! accurate! (Griffin,!2002)!but!the!aim!of!this!paper!is!mainly!to!explain!abnormal!return!by!liquidity.! ! If!either!the!Fama!French!or!the!market!model!is!correct,!the!alpha!should!equal!zero.!If! alpha! has! a! value! significantly! different! from! zero! this! can! be! interpreted! as! the! proof! of! abnormal!return!(Brav,!Ceczy,!&!Gompers,!2000).!This!alpha!will!be!mentioned!further!as!both! Jensen’s! alpha! and! alpha,! named! after! Michael! Jensen! (1968).! If! managers! time! corporate! events! to! coincide! with! misvaluations,! Jensen’s! alpha! has! a! lower! power! then! the! BHAR! (Loughran! &! Ritter,! 2000).! To! overcome! this! problem! Fama! (1998)! recommends! weighting! calendar! months! by! the! number! of! event! observations.! When! Jensen’s! alpha! is! statistically! different! from! zero,! using! a! tVtest,! it! can! be! concluded! that! on! average! IPO! firms! experience! abnormal!return!on!the!Indonesian!Stock!Exchange.! ! This!results!in!the!estimated!model!for!Fama!French!and!market!model:! Fama!French! ! ! !"_!"!! _{= !} !"+ !!!! !!"− !!" +!!!!!!"#!+ !!!!!"#!! Market!model!! ! !"_!"!! _{= !} !"+ !!!! !!" − !!" !

! If! Jensen’s! alpha! is! statistically! different! from! zero,! abnormal! return! is! defined! as! the! dependent! variable! that! is! calculated! by! subtracting! estimated! normal! return! from! actual! return!for!each!firm.!

Based! on! literature,! the! explanatory! variables,! as! determined! in! chapter! 2,! form! the! fundaments! for! the! extensive! model,! on! which! abnormal! return! is! regressed.! Variables! are! added!to!control!for!specific!factors,!which!are!explained!further!on!the!next!page!and!in!table! 1.! This! model! represents! the! important! factors! that! explain! part! of! abnormal! return! by! liquidity!in!developed!countries.!Analysis!in!chapter!4!will!outline!what!this!results!is!and!if!the! control! factors! play! a! significant! role.! The! explanatory! variables! and! control! variables! combined!make!the!following!extensive!model:! ) Extensive)model) !"!" = ! + !!!"!ln!(!!") + !!!"!ln!(!"!") + !!!!!"+ !!!"!" + !_!!1_!+ !_!ln!(!"_!") + !_!!_!"+ !_!"! ! ! ! ! ! !"!"!=!Abnormal!return!calculated!by!actual!return!minus!expected!return.! ! ! !"!(!_!")!=!Natural!logarithm!of!monthly!average!bidVask!spread.!BidVask!spread!is! ! ! explained!more!in!detail!further!in!this!paragraph.! ! ! !"!(!"_!")!=!Natural!logarithm!of!monthly!average!price!sensitivity.!Price!! ! ! sensitivity!is!also!explained!more!in!detail!further!in!this!paragraph.! ! ! !!!"!=!FreeVfloat!rate:!percentage!of!shares!available!to!ordinary!shareholders.! ! ! !"_!"!=!FreeVfloat!foreign!holdings!rate:!percentage!of!number!of!freeVfloat!shares! ! ! held!by!strategic!(≥5%)!foreign!investors.! ! ! !"!!=!First!day!underpricing:!first!day!closing!price!minus!offer!price!divided!by! ! ! offer!price.! ! ! !"!(!"_!")!=!Natural!logarithm!of!market!value!of!equity!of!stock.! ! ! !_!"!=!Age!of!the!index!in!years:!date!minus!year!of!establishment!(2007).! !

! A! variation! of! this! extensive! model! will! be! used! to! measure! individual! relation! and! robustness! of! individual! factors.! The! conclusion! will! depend! on! the! significance! of! the! coefficient!of!the!explanatory!variables!and!links!this!to!the!theories!in!chapter!2.!

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Once! abnormal! return! is! established! as! dependent! variable,! it! can! be! explained! by! liquidity! according!to!Rhee!and!Wang!(2009).!In!their!paper!they!identify!three!measures!for!liquidity:! the!bidVask!spread,!depth!of!a!stock!and!price!sensitivity.!Due!to!the!fact!that!data!to!calculate! the!depth!of!the!stock!cannot!be!obtained!freely,!this!paper!will!only!use!the!bidVask!spread!and! the!price!sensitivity!as!measures!for!liquidity.!These!can!be!calculated!as!follows:!

• BidVask! spread! of! the! stock! is! denoted! by!!!" =_(!"#(!"#!"!!!"#!")

!"!!!"#!")/!,! where! the! best! bid/ask!

prices!are!used!endVofVday.! • Price! sensitivity:! !"!" = !!_!!" !"= ! !"!(!_!"!/!_!"!) !!" ,! where! !!" !_!&!!

!"! !are! intraday! high! en! low!

prices!and!!_!"!is!the!traded!day!value!of!stock.!

The! daily! liquidity! measures! are! converted! from! daily! (d)! into! equally! weighted! average! monthly!(t)!rates!for!each!firm!(i)!to!explain!abnormal!return.!

! As! table! 1! shows,! both! bidVask! spread! and! price! sensitivity! have! a! large! kurtosis.! Skewness! for! price! sensitivity! is! also! large.! The! conversion! into! natural! logarithm! for! these! variables!lowers!the!kurtosis!for!both.!It!lowers!the!Skewness!for!price!sensitivity!as!well!but! not!for!the!bidVask!spread.!Since!the!overall!values!are!better!for!the!natural!logarithms!and!a! change!in!liquidity!is!better!than!letting!a!static!value!explaining!abnormal!return,!these!will!be! used!in!the!regression.!

! Besides!the!explanatory!variables!bidVask!spread!and!price!sensitivity!there!are!other! factors! that! influence! either! abnormal! return! or! liquidity.! The! freeVfloat! rate! is! an! important! factor!driving!liquidity!according!to!Chan,!Chan!and!Fong!(2004).!This!variable!is!defined!as!the! percentage!of!outstanding!shares!available!to!ordinary!investors.!According!to!Chan,!Chan!and! Fong!(2004)!a!decrease!in!the!freeVfloat!rate,!decreases!liquidity.!

! As!already!stated!in!chapter!2,!the!research!of!Rhee!and!Wang!(2009)!provides!evidence! that! foreign! investors! influence! liquidity.! Foreign! holdings! rate! is! percentage! of! free! float! shares!held!by!strategic!(≥5%)!foreign!investors.!

! First!day!underpricing![U1]:!(first!day!closing!price!–!offer!price)!/!offer!price.!The!cause! of!IPO!underpricing!is!not!yet!completely!clarified!but!can!have!a!significant!influence!in!longV run!return!(Derrien,!2005).!

! Natural! logarithm! of! Market! capitalization! in! rupiah! [LN_MV]:! natural! logarithm! of! outstanding!shares!x!share!price.!Both!market!value!and!its!natural!logarithm!are!summarized! in!table!1.!Market!value!has!a!wide!range!of!possible!values!(between!1,21E+09!and!4,02E+14).! Performing!a!tVtest!on!both!individual!means!are!unequal!to!zero,!yield!a!tVvalue!of!122,9492! and!915,7183!respectively!for!Market!value!and!its!natural!logarithm.!Besides!these!arguments! the! skewness! and! kurtosis! are! lower! in! absolute! value.! Therefore! the! natural! logarithm! of! market!value!is!used!in!the!regressions.!

! Age!of!index![A]:!years!since!opening!of!IDX.!No!significant!literature!is!found!to!suggest! that! this! variable! is! of! influence! though! it! is! easily! reasoned.! Indonesia! is! classified! as! an!

emerging!market!according!to!Goldman!Sachs!(2007)!and!the!current!IDX!was!geographically! split!before!2007.!It!is!not!unlikely!to!think!of!a!factor!for!trust!that!IDX!had!to!prove!it!was! trustworthy!and!better!than!the!two!separate!stock!exchanges.!To!control!for!that!possibility! this!factor!is!added.! ! Table)1) Summary!statistics!of!dependent!variable!abnormal!return!and!control!variables.!

Variable! #!of!observations! Mean! St.!Dev.! Min! Max! Skewness! Kurtosis!

Abnormal,return, 1783! 0,059! 0,012! V0,069! 0,272! 7,976! 167,191! Bid@ask,spread, 1715! 0,033! 0,072! V1,107! 0,727! 0,014! 62,368! Natural,logarithm,of, bid@ask,spread, 1715! V3,955! 0,836! V5,289! V0,566! 1,323! 4,674! Price,sensitivity, 1736! 0,008! 0,069! V0,581! 1,665! 14,882! 299,601! Natural,logarithm,of, price,sensitivity, 1684! V9,997! 2,958! V18,099! 0,221! 0,454! 2,709! Free@float,rate, 1391! 0,287! 0,167! 0,030! 1,000! 2,097! 10,038! Foreign,holdings, 1391! 0,166! 0,265! 0,000! 0,910! 1,401! 3,543! First,day, underpricing, 73! 0,121! 0,125! 0,000! 0,476! 1,190! 3,307! Market,value, 1783! 4,30E+13! 6,70E+13! 1,21E+09! 4,02E+14! 2,052! 7,081!

Natural,logarithm,of, market,value, 1783! 17,316! 3,617! 10,674! 22,115! V0,490! 1,559! Age,of,index, 1783! 3,9243! 1,3166! 1! 6! V0,349! 2,408! !! !! !! !! !! !! !! !! ! ! 3.2,Data,

In! literature! of! Carter,! Dark,! &! Singh! (1998)! and! Teoh,! Welch,! &! Wong! (1998)! IPO! long! run! performance!is!measured!using!a!timeframe!of!three!years!post!IPO.!Since!the!beginning!of!the! IDX!in!2007,!120!companies!are!enlisted!on!the!exchange.!Using!a!threeVyear!timeframe!will! remove! 72! companies,! leaving! 48! companies! to! test.! If! a! twoVyear! timeframe! is! used,! the! number! of! companies! to! be! analyzed! is! 73.! These! companies! have! gone! IPO! between! March! 2008! and! December! 2011.! To! yield! a! more! significant! result,! this! paper! will! use! a! twoVyear! timeframe.!Stock!price!and!other!variables!are!obtained!till!two!year!after!their!IPO.!

! Besides!the!robustness!check!for!abnormal!return,!a!check!will!be!done!for!liquidity!as! well.!As!figure!1!shows!on!the!next!page,!there!is!a!change!in!the!cumulative!abnormal!return! where!the!first!quarter!of!2011!peaks!and!where!after!it!slowly!decreases!until!a!small!negative! cumulative!abnormal!return!at!the!end!of!2013.!If!the!liquidity!measures!are!robust!then!they!

should! be! significant! and! yield! the! same! sign! of! causality! for! all! three! periods:! 2008V2013,! 2008V2011!and!2011V2013.!

!

Figure)1)

This!graph!visualizes!the!cumulative!functions!of!abnormal!return,!expected!return,!actual!return!and!the!riskVfree! rate.! Both! abnormalV! and! expected! return! is! calculated! using! the! market! model.! Lines! are! created! in! STATA! by! summing!the!nonVcumulative!variables!as!explained!in!chapter!3.!

! !

! Data! about! stock! return! and! index! return! are! available! in! DATASTREAM.! Variables! to! calculate!the!liquidity!proxies!are!obtained!from!DATASTREAM!as!well,!same!as!data!for!the! control! variables.! The! riskVfree! rate! (Jakarta! Interbanking! Offered! Rate! (JIBOR))! can! be! acquired!from!the!Indonesian!Central!Bank:!Bank!Indonesia!(Bank!Indonesia,!2013).!Monthly! riskVfree!rates!are!used!to!calculate!market!premium!and!normal!return.!!

! The! correlation! matrix! in! table! 2! does! not! suggest! a! possibility! for! multicollinearity! between! variables.! Though! there! is! a! high! correlation! between! abnormal! return! and! the! natural!log!of!bodVask!spread!and!a!high!correlation!between!abnormal!return!and!the!natural! log!of!price!sensitivity,!this!does!not!suggest!multicollinearity.! ! ! ! ! -1 0 0 10 20 30 40 2008m1 2010m1 2012m1 2014m1 Date

Cum abnormal return market model Cum risk free rate Cum expected return market model Cum stock return

Table)2)

Correlation!matrix.!

Reports!the!correlation!matrix!of!the!dependent!variable!and!all!explanatory!and!control!variables.!

Variable! AR! LN_S! LN!_PS! FF! FH! U1! MV! LN_MV! A!

AR, 1,000! !! !! !! !! !! !! !! !! LN_S, V0,928! 1,000! !! !! !! !! !! !! !! LN_PS, 0,889! V0,798! 1,000! !! !! !! !! !! !! FF, V0,376! 0,693! V0,300! 1,000! !! !! !! !! !! FH, 0,214! V0,214! 0,630! V0,187! 1,000! !! !! !! !! U1, 0,795! V0,802! 0,430! V0,416! V0,391! 1,000! !! !! !! MV, V0,742! 0,462! V0,832! V0,262! V0,414! V0,319! 1,000! !! !! LN_MV, V0,423! 0,260! V0,779! V0,111! V0,889! 0,210! 0,768! 1,000! !! A, V0,036! 0,322! 0,310! 0,684! 0,577! V0,529! V0,624! V0,787! 1,000! !! !! !! !! !! !! !! !! !! !! ! ! 4.)Empirical)results)

This! chapter! discusses! the! results! from! the! baseline! model,! which! estimates! the! impact! of! liquidity! on! abnormal! return! while! controlling! for! other! effects.! First,! abnormal! return! is! measured! and! tested! for! both! the! Fama! French! threeVfactor! model! and! the! market! model.! Second,! the! effect! of! free! float! shares! and! foreign! holdings! on! the! liquidity! measures! is! established!by!a!regression.!After!the!effect,!shown!in!table!4,!the!regression!of!the!baseline!will! indicate!which!factors!are!important!for!explaining!abnormal!return.!

!

4.1,Abnormal,return,

Table! 3! gives! important! findings! about! abnormal! return! for! IPO! stocks! at! the! IDX.! Both! the! threeVfactor! model! and! the! market! model! show! a! significant! alpha! different! from! zero:! 0,000692! and! 0,000575! for! the! Fama! French! and! the! market! model! respectively.! Though! Jensen’s!Alpha!is!small,!it!is!significant!at!the!1%!level.!Figure!1!visualizes!the!reason!for!this! result!where!cumulative!abnormal!return!spikes!at!the!first!quarter!of!2011.!From!there!on!it! slowly!decreased!to!a!negative!value!at!the!end!of!2013.!!

! Though!both!alphas!are!significant,!the!highVminusVlow!factor!of!the!Fama!French!model! is!not!significant.!However,!SMB!and!HML!are!jointly!significant!with!a!FVtest!that!yields!a!pV value! of! 0,0008.! Most! likely! this! is! due! to! the! fact! that! factors! are! used! for! developed! Asian! markets! instead! of! Indonesia! specific.! The! developed! Asian! market! factors! do! contain! some! regional!information.!Though!the!factors!are!jointly!significant,!due!to!the!fact!that!the!factors!

are!not!Indonesia!specific!combined!with!an!insignificant!value!for!HML,!the!remainder!of!this! paper!will!use!calculations!based!on!the!market!model.!

Hypothesis)1!! IPO!firms!in!Indonesia!experience!longVrun!positive!or!! ! !

! ! ! negative!abnormal!returns!

This! hypothesis! cannot! be! discarded! based! on! the! dataset! used! and! analysis! done! on! this! dataset.!Both!alphas!are!statistically!significant!different!than!zero!as!provided!in!table!3.! !

Table)3)

Evidence!of!abnormal!return!by!Jensen’s!alpha!(constant).!RVRF!stands!for!the!return!of!firm!i!minus!the!riskVfree! rate.!MKPR!is!market!premium!calculated!by!market!return!minus!the!riskVfree!rate;!SMB!is!the!size!factor!and! HML! is! the! value! factor.! First! values! are! the! regression! coefficients;! values! between! brackets! are! the! robust! standard!errors.! !! !! RVRF!FF3! !! RVRF!MM! !! ,, !! !! !! !! !! MKPR, !! 0,704! ***! 0,708! ***! ,, !! (0,014)! !! (0,0198)! !! SMB, !! 2,65EV04! ***! !! !! ,, !! (8,22EV05)! !! !! !! HML, !! V8,45EV05! !! !! !! ,, !! (9,59EV05)! !! !! !!

CONSTANT, !! 6,92EV04! ***! 5,75EV04! ***!

,, !! (1,95EV04)! !! (0,0002)! !! R^2, !! 0,0661! !! 0,0659! !! !! !! !! !! !! !! *!!TwoVsided!significance!at!10%! !! !! !! **!!TwoVsided!significance!at!5%! !! !! !! !! ***!!TwoVsided!significance!at!1%! !! !! !! ! ! 4.2,Endogeneity,

As! suggested! by! theory,! the! freeVfloat! rate! is! of! influence! for! liquidity! (Chan,! Chan,! &! Fong,! 2004).!In!table!4!this!is!proven!for!the!dataset!for!this!paper.!The!explanatory!power!(R2_)!of!the!

models! is! 0,1630! and! 0,2175! for!ln!(!_!")!and!ln!(!"_!")!respectively.! Though! the! R2_{! is! not! high!}

for! both,! all! the! variables! are! statistically! significant! at! the! 1%! level! except! for! the! variable! actual!return!(R)!in!the!ln!(!!")!regression,!which!is!significant!at!the!10%!level.!This!regression!

has!as!result!that!both!freeVfloat!rate!and!foreign!strategic!holdings!are!of!influence!for!the!bidV ask! spread.! An! increase! in! one! will! result! in! a! decrease! in! the! bidVask! spread! which! partial! confirms! the! findings! of! Rhee! and! Wang! (2009).! In! their! paper! a! positive! change! of! foreign! strategic!holdings!had!as!result!an!increase!of!the!bidVask!spread.!Along!again!with!the!findings!

of!Rhee!and!Wang!(2009),!foreign!holdings!increases!the!sensitivity!of!the!stock!price.!The!freeV float!rate!however!decreases!the!stock!price!sensitivity.!The!causal!interpretation!of!this!result! is!ambiguous.!There!might!be!other!factors!that!have!influence!on!both!the!freeVfloat!rate!and! price!sensitivity.!This!effect!is!beyond!the!scope!of!this!paper!and!will!not!be!further!explored.! ! Simultaneously,! table! 4! proves! that! the! freeVfloat! rate,! foreign! holdings,! the! natural! logarithm! of! market! value! and! age! of! the! index! are! important! to! be! added! in! the! extensive! model.! All! factors! that! influence! explanatory! variables! should! be! included! in! the! regression! model.! ! This! is! needed! to! prevent! omitted! variable! bias.! Though! it! is! unlikely! to! capture! all! variables!of!influence,!these!variables!are!captured.!The!exogeneity!of!the!natural!logarithm!of! bidVask!spread!and!price!sensitivity!can!be!proven!by!the!Hausman!test!for!exogeneity.!When! all!variables!are!regressed!on!ln!(!_!")!and!again!on!ln!(!"_!"),!their!residuals!are!calculated!and! abnormal! return! is! regressed! on! all! variables! and! the! residuals,! the! pVvalues! are! 0,231! and! 0,389! for!ln!(!!")!and!ln!(!"!")!respectively.! This! means! that! the! residuals! do! not! contain!

enough!information!to!be!statistically!significant!for!abnormal!return!and!therefore!make!bidV ask!spread!and!price!sensitivity!exogenous.! ! Table)4) Impact!of!freeVfloat!rate!(FF)!and!foreign!hold!shares!(FH)!on!bidVask!spread!and!price!sensitivity.!Regression!is! controlled!for!return!of!stock!(R),!age!of!the!index!(A)!and!changes!in!market!value.!First!value!is!the!coefficient.! Values!between!brackets!are!the!robust!standard!deviations.! !! !! LN_S! !! LN_PS! !! ,, !! !! !! !! !! R, !! 0,360! *! V1,594! ***! ,, !! (0,1939)! !! (0,5818)! !! FF, !! V0,304! ***! V1,292! ***! ,, !! (0,0325)! !! (0,1081)! !! FH, !! V0,184! ***! 0,222! ***! ,, !! (0,0163)! !! (0,0595)! !! LN_MV, !! V0,054! ***! V0,396! ***! ,, !! (1,46EV03)! !! (5,23EV03)! !! A, !! 4,75EV04! ***! 8,19EV04! ***! ,, !! (6,25EV05)! !! (2,07EV04)! !! CONSTANT, !! V3,215! ***! V3,715! ***! ,, !! (0,0469)! !! (0,1518)! !! R^2, !! 0,1630! !! 0,2175! !! !! !! !! !! !! !! *!!TwoVsided!significance!at!10%! !! !! !! **!!TwoVsided!significance!at!5%! !! !! !! !! ***!!TwoVsided!significance!at!1%! !! !! !! !

4.3,Liquidity,

Multiple! regressions! are! performed! to! determine! which! variable! is! indeed! significant! for! explaining!abnormal!return.!The!regression!is!built!up!step!by!step!by!adding!variables.!The! first! regression! model! on! abnormal! return,! model! 1! in! table! 5,! contains! both! natural! log! liquidity!variables.!Both!measures!are!significant!at!the!1%!level.!The!logarithm!of!the!bidVask! spread!(LN_S)!is!0,0020418.!A!1%!increase!in!the!bidVask!spread!increases!abnormal!return!by! 0,0020418.!A!1%!rise!in!price!sensitivity!(LN_PS)!decreases!abnormal!return!by!0,0006418.!At! first!this!is!an!odd!result!but!according!to!the!paper!of!Pastor!&!Stambaugh!(2003)!stocks!with! high!price!volatility!have!substantially!higher!expected!returns.!Higher!expected!returns!means! lower!abnormal!returns.!The!explanatory!power!of!model!1!is!very!low:!0,0024!(0,24%).!! ! Theory!predicts!that!the!freeVfloat!rate!influences!liquidity!(Chan,!Chan,!&!Fong,!2004).! The!same!is!proven!by!Rhee!and!Wang!in!2009!for!foreign!strategic!positions.!For!the!dataset! used! in! this! paper! it! is! verified! in! table! 4! that! foreign! strategic! positions! are! statically! significant.! However,! if! the! freeVfloat! rate! and! foreign! strategic! positions! are! added! to! the! regression!in!model!2!they!both!generate!insignificant!coefficients!even!at!the!10%!level.!

Explanatory!power!rises!from!0,24%!to!0,30%!but!this!difference!is!not!significant!(pVvalue!of! 0,2923!as!result!of!a!FVtest).!

! Model! 3! and! 4! do! not! provide! an! extra! significant! explanatory! variable! for! abnormal! return.! Adding! first! day! underpricing! [U1]! in! model! 4,! more! than! doubles! the! explanatory! power!from!0,30%!to!0,75%!but!this!difference!is!not!significant.!A!possible!explanation!for!the! insignificant! effect! of! U1! is! to! few! observations.! Only! 73! observations! are! available,! one! for! each!company.!

! The! model! that! includes! all! the! variables! is! model! 5.! The! age! of! the! index! in! years! is! added!to!the!regression.!Though!not!proven!in!current!literature,!the!variable!is!significant!at! the! 5%! level! with! a! coefficient! of! V0,000541.! An! extra! year! of! age! lowers! abnormal! return,! which!at!first!would!prove!the!trust!in!the!IDX,!has!increased!and!companies!trade!more!often! at!the!IDX.!This!conclusion!is!too!quick!to!be!made.!As!figure!1!suggest,!cumulative!abnormal! return!is!not!stable!throughout!the!timeframe.!According!to!figure!1,!the!regression!models!3! and!7!are!divided!in!periods!where!2008V2011!is!the!period!with!high!cumulative!abnormal! return!and!2011V2013!with!decreasing!cumulative!returns.!These!regressions!are!represented! in!table!6.!These!models!show!that!the!effect!of!age!depends!on!the!period.!It!is!not!significant! across!periods.! ! Further!in!model!5!of!table!5,!the!bidVask!spread!and!price!sensitivity!are!of!significant!

Ti m $W aa ije r$ –$ Uv A$ –$ 2013/ 2014 $ 16 $ b le &5 & e$ im pa ct $o f$ th e$ na tur al $l og $t ra ns fo rm at io n$ of $bi dB as k$ sp re ad $an d$ pr ic e$ se ns it ivi ty$ on $t he $d ep en de nt $var iab le $ab nor m al $r et ur n. $T he $e xp lan at or y$ var iab le s$ ar nt ro lle d$ fo r$ th e$ fr ee Bflo at $r ate ,$f ore ig n$ ho ld in gs ,$th e$ na tu ra l$l og $tra ns fo rm ati on $o f$m ark et$ va lu e$ of $a ll$ sh are s$ of $fi rm $i$ an d, $th e$ ag e$ of $th e$ in de x$ in $y ea rs .$Nu m be tw ee n$ br ac ke ts $a re $r obus t$ st and ar d$ de vi at io n. $LN _S$ is $t he $n at ur al $logar it hm $of $t he $b id Bas k$ sp re ad ;$LN _P S$ is $t he $n at ur al $logar it hm $of $p ri ce $s en si ti vi ty; $FF$ is $t ee Bflo at $r at e; $F R $is $th e$ fo re ig n$ ho ld in gs ;$L N _M V $th e$ na tu ra l$lo ga rit hm $o f$t he $m ar ke t$v alu e; $U 1$ th e$ un de rp ric in g$ of$ th e$ fir st $d ay $an d$ A $is $th e$ age $of $th e$ in de x. $ $ (1 )$ $$ (2 )$ $$ (3 )$ $$ (4 )$ $$ (5 )$ $$ (6 )$ $$ (7 )$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ _S ! 2, 04E B03 $ *** $ 2, 63E B03 $ *** $ 2, 64E B03 $ *** $ 2, 65E B03 $ *** $ 2, 67E B03 $ *** $ 1, 99E B03 $ *** $ 2, 63E B03 $ *** (5 ,5 9E B04) $ $$ (5 ,6 9E B04) $ $$ (5 ,7 1E B04) $ $$ (5 ,7 2E B04) $ $$ (5 ,7 2E B04) $ $$ (5 ,5 6E B04) $ $$ (5 ,6 8E B04) $ $$ _P S! B6, 42E B04 $ *** $ B5, 88E B04 $ *** $ B5, 57E B04 $ *** $ B5, 55E B04 $ *** $ B5, 54E B04 $ *** $ B6, 49E B04 $ *** $ B5, 72E B04 $ *** (8 ,5 9E B05) $ $$ (8 ,6 1E B05) $ $$ (9 ,4 6E B05) $ $$ (9 ,4 6E B05) $ $$ (9 ,4 6E B05) $ $$ (8 ,6 6E B05) $ $$ (8 ,5 7E B05) $ $$ ! $$ $$ B7, 04E B04 $ $$ B6, 43E B04 $ $$ B2, 73E B03 $ $$ B1, 75E B03 $ $$ $$ $$ B2, 22E B03 $ *$ $$ $$ (1 ,3 5E B03) $ $$ (1 ,35E B03) $ $$ (1 ,4 0E B03) $ $$ (1 ,4 2E B03) $ $$ $$ $$ (1 ,3 5E B03) $ $$ ! $$ $$ 9, 63E B04 $ $$ 1, 02E B03 $ $$ 5, 45E B04 $ $$ 8, 50E B04 $ $$ $$ $$ $$ $$ $$ $$ (7 ,3 5E B04) $ $$ (7 ,3 2E B04) $ $$ (7 ,3 3E B04) $ $$ (7 ,3 3E B04) $ $$ $$ $$ $$ $$ _M V! $$ $$ $$ $$ 6, 28E B05 $ $$ 5, 64E B05 $ $$ 5, 36E B05 $ $$ $$ $$ $$ $$ $$ $$ $$ $$ (7 ,2 1E B05 )$ $$ (7 ,1 9E B05) $ $$ (7 ,2 1E B05) $ $$ $$ $$ $$ $$ ! $$ $$ $$ $$ $$ $$ B1, 24E B04 $ $$ 9, 79E B04 $ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ (1 ,1 5E B03) $ $$ (1 ,2 2E B03) $ $$ $$ $$ $$ $$ ! $$ $$ $$ $$ $$ $$ !! $$ B5, 41E B04 $ ** $ B4, 34E B04 $ ** $ B5, 72E B04 $ ** $ $$ $$ $$ $$ $$ $$ $$ $$ (2 ,5 6E B04) $ $$ (2 ,1 5E B04) $ $$ (2 ,5 5E B04) $ $$ N ST AN T! 1, 55E B03 $ $$ 4, 38E B03 $ *$ 3, 61E B03 $ ** $ 5, 00E B04 $ ** $ 6, 61E B03 $ ** $ 2, 98E B03 $ $$ 7, 64E B03 $ *** (2 ,3 2E B03) $ $$ (2 ,2 9E B03) $ $$ (2 ,3 0E B03) $ $$ (2 ,5 7E B03) $ $$ (2 ,8 6E B03) $ $$ (2 ,5 5E B03) $ $$ (2 ,8 3E B03) $ $$ 2! 0, 0024 $ $$ 0, 0030 $ $$ 0, 0030 $ $$ 0, 0075 $ $$ 0, 0093 $ $$ 0, 0026 $ $$ 0, 0032 $ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $T w oB si de d$ si gn if ica nce $a t$1 0% $ $T w oB si de d$ si gn if ica nce $a t$5 % $ $T w oB si de d$ si gn if ica nce $a t$1 % $

influence$ to$ explain$ abnormal$ return.$ The$ coefficient$ of$ the$ bidBask$ spread$ is$ 0,002668$ and$ that$for$price$sensitivity$is$B0,0005536.$These$values$do$not$differ$much$from$previous$models$ and$the$sign$is$the$same$in$all.$

$ Based$ on$ the$ previous$ models,$ the$ significant$ variables$ are$ the$ bidBask$ spread,$ price$ sensitivity$and$age$of$the$index.$The$regression$analysis$of$these$variables$results$in$model$6$of$ table$5$where$all$variables,$except$for$the$constant,$are$significant$at$least$at$the$5%$level.$$The$ bidBask$spread$and$price$sensitivity$show$the$same$sign$of$causality$and$age$shows$the$same$ sign$as$in$model$5$as$well.$ $ While$model$2$was$promising$but$the$result$were$not$as$forecasted,$model$7$specifies$ only$the$free$float$rate$and$age$as$control$variable$and$leaves$out$the$foreign$strategic$holding$ variable.$This$final$model$contains$only$significant$variables,$including$the$intercept.$The$freeB float$ rate$ is$ significant$ at$ the$ 10%$ level$ and$ has$ a$ coefficient$ with$ value$ B0,0022242.$ A$ oneB percentage$point$increase$of$the$freeBfloat$rate$results$in$lower$abnormal$return$of$0,0022242$ percentage$point.$ $ Table&6& Regression$model$3$and$7$divided$per$period.$First$values$are$the$regression$coefficients.$Second$values$between$ brackets$are$the$robust$standard$deviations.$$ $$ Abnormal$return$(model$3,$table$5)$ $$ Abnormal$return$(model$7,$table$5)$ $$ $$ 2008B2011$ $$ 2011B2013$ $$ 2008B2011$ $$ 2011B2013$ $$ !! $$ $$ $$ $$ $$ $$ $$ $$

LN_S! 5,22EB03$ ***$ 1,57EB03$ ***$ 5,32EB03$ ***$ 1,55EB03$ ***$

!! (1,39EB03)$ $$ (5,87EB04)$ $$ (1,38EB03)$ $$ (5,86EB04)$ $$

LN_PS! B5,28EB04$ **$ B5,30EB04$ ***$ B8,69EB04$ ***$ B4,85EB04$ ***$

!! (2,65EB04)$ $$ (9,77EB05)$ $$ (2,38EB04)$ $$ (8,74EB05)$ $$

FF! B3,60EB03$ *$ B9,48EB04$ $$ B9,23EB03$ ***$ B1,15EB03$ $$

!! (2,06EB03)$ $$ (2,11EB03)$ $$ (3,39EB03)$ $$ (1,97EB03)$ $$

FH! 7,22EB04$ $$ 7,14EB04$ $$ $$ $$ $$ $$ !! (1,94EB03)$ $$ (7,94EB04)$ $$ $$ $$ $$ $$ LN_MV! 6,87EB04$ ***$ B7,35EB05$ $$ $$ $$ $$ $$ !! (2,13EB04)$ $$ (7,77EB05)$ $$ $$ $$ $$ $$ A! $$ $$ $$ $$ B5,85EB03$ **$ 1,25EB04$ $$ !! $$ $$ $$ $$ (2,67EB03)$ $$ (3,44EB04)$ $$

CONSTANT! 5,84EB03$ $$ 1,67EB03$ $$ 3,41EB02$ ***$ 3,29EB04$ $$

!! (5,62EB03)$ $$ (2,45EB03)$ $$ (0,0103)$ $$ (3,16EB03)$ $$

R^2! 0,0135$ $$ 0,0018$ $$ 0,0122$ $$ 0,0017$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ *$$TwoBsided$significance$at$10%$ **$$TwoBsided$significance$at$5%$ ***$$TwoBsided$significance$at$1%$ $

$ What$more$can$be$concluded$from$table$6,$is$that$liquidity$is$significant$for$sub$periods$ as$ well.$ In$ both$ model$ 3$ and$ 7$ in$ table$ 6,$ the$ liquidity$ measures$ln!(!_!")$and$ln!(!"_!")$are$ significant$and$have$the$same$sign.$This$robustness$check$is$important$for$the$final$statement$ and$conclusion.$

$

Summarizing$this$analysis,$in$all$models$the$bidBask$spread$and$price$sensitivity$is$significant$ and$ have$ the$ same$ causality$ sign.$ An$ increase$ in$ the$ bidBask$ spread$ results$ in$ a$ higher$ abnormal$return$on$average.$An$increase$in$price$sensitivity$yields$a$lower$abnormal$return$on$ average.$ However$ it$ is$ hard$ to$ say$ that$ these$ models$ give$ a$ useable$ prediction$ since$ the$ explanatory$power$of$the$models$is$low,$ranging$from$0,0024$to$0,0093.$None$of$the$models$ explain$more$than$1%$of$the$variance.$

$ Therefore,$hypothesis$2.1$and$2.2$can$both$be$accepted.$The$bidBask$spread$and$price$ volatility$ are$ of$ statistical$ significant$ influence$ on$ abnormal$ return$ though$ the$ model$ in$ this$ paper$does$not$hold$other$factors$that$are$likely$more$influential.$ Hypothesis&2.1$ Liquidity$spread$influences$firm$performance$ Hypothesis&2.2$ Liquidity$volatility$influences$firm$performance$ $ 5.&Conclusion& This$paper$aimed$to$explain$part$of$abnormal$return$for$companies,$listed$at$the$Indonesian$ Stock$Exchange$that$had$gone$IPO,$through$liquidity.$It$is$important$to$understand$if$liquidity,$ which$is$of$importance$in$developed$markets,$have$significant$influence$in$Indonesia.$The$first$ step$in$this$paper$was$to$prove$that$IPO$stocks$listed$on$the$IDX$experience$abnormal$returns.$ Following$Jensen’s$Alpha,$this$abnormal$return$is$proven$though$cumulative$abnormal$return$ for$ the$ period$ 2008B2013$ is$ small.$ Theory$ already$ suggested$ that$ it$ is$ likely$ that$ stock$ in$ emerging$countries$experience$abnormal$return$(Henry,$2000).$

$ Step$two$was$testing$the$explanatory$variables$bidBask$spread$and$price$sensitivity$on$ abnormal$ return.$ In$ the$ period$ 2008B2013$ in$ this$ paper,$ both$ bidBask$ spread$ and$ price$ sensitivity$ are$ significant$ for$ explaining$ abnormal$ return$ in$ all$ models.$ This$ is$ in$ line$ with$ findings$of$Bekaert$and$Harvey$(1997,$2003).$They$find$that$both$price$sensitivity$and$bidBask$ spread$ is$ of$ influence$ on$ abnormal$ return.$ Even$ when$ tested$ for$ robustness$ for$ sub$ period$ significance,$the$natural$logarithms$of$the$bidBask$spread$and$price$sensitivity$are$significant$ with$the$same$sign$in$all$periods.$

$ As$found$in$the$paper$of$Rhee$and$Wang$(2009),$freeBfloat$shares$give$a$better$model$ than$without,$though$foreign$hold$shares$are$not$of$statistical$influence$in$this$paper.$However,$ freeBfloat$is$not$robust$for$sub$periods.$

$ Though$liquidity$is$statistical$significant,$this$model$apparently$does$not$capture$more$ important$ factors$ that$ explain$ abnormal$ return$ in$ emerging$ market$ due$ to$ the$ very$ low$ explanatory$power$of$the$models$(all$R2_{$are$less$than$1%).$This$is$not$in$line$with$research$of$}

Fang,$ Noe$ and$ Tice$ (2009).$ They$ find$ that$ liquidity$ has$ a$ significant$ explanatory$ power$ in$ developed$ markets.$ A$ possible$ explanation$ is$ that$ for$ Indonesia$ local$ factors$ are$ more$ important$in$asset$pricing$(Bekaert,$&$Harvey,$1997).$These$macroBeconomical$factors$are$not$ captured$in$this$paper.$

$ Furthermore,$ a$ robustness$ check$ with$ other$ liquidity$ measures$ can$ be$ done$ if$ more$ data$is$available$for$Indonesia.$Much$of$this$data$is$not$freely$obtainable$such$as$intraday$data$ and$bidBask$closing$volumes.$More$proxies$of$liquidity$can$then$be$calculated$and$regressed$on$ abnormal$return.$Same$holds$for$calculating$abnormal$return.$When$the$Fama$French$factors$ are$known$for$Indonesia$specific,$a$more$accurate$abnormal$return$is$measured.$

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