Does ERM sophistication drive IPO initial performance in emerging market? Evidence from Malaysian market

Norliza Che Yahya; Siti Sarah Alyasa-Gan; Rasidah Mohd-Rashid Article Does ERM sophistication drive IPO initial performance in emerging market? Evidence from Malaysian market ACRN Journal of Finance and Risk Perspectives (JOFRP) Provided in Cooperation with: ACRN Oxford Research Network, Oxford Suggested Citation: Norliza Che Yahya; Siti Sarah Alyasa-Gan; Rasidah Mohd-Rashid (2022) : Does ERM sophistication drive IPO initial performance in emerging market? Evidence from Malaysian market, ACRN Journal of Finance and Risk Perspectives (JOFRP), ISSN 2305-7394, ACRN Oxford Research Network, Oxford, Vol. 11, pp. 141-157, https://doi.org/10.35944/jofrp.2022.11.1.008 This Version is available at: https://hdl.handle.net/10419/329623 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-sa/4.0/ ACRN Journal of Finance and Risk Perspectives 11 (2023) 141-157 * Corresponding author. E-Mail address: [email protected] https://doi.org/10.35944/jofrp.2022.11.1.008 ISSN 2305-7394 Contents lists available at SCOPUS ACRN Journal of Finance and Risk Perspectives journal homepage: http://www.acrn-journals.eu/ Does ERM Sophistication Drive IPO Initial Performance in Emerging Market? Evidence from Malaysian Market Norliza Che-Yahya*,1, Siti Sarah Alyasa-Gan2, Rasidah Mohd-Rashid3 1 Universiti Teknologi MARA, Malaysia 2Management and Science University, Malaysia 3Universiti Utara Malaysia ARTICLE INFO ABSTRACT Article history: Received 17 April 2022 Revised 25 July and 13 October 2022 Accepted 07 November 2022 Published 05 March 2023 The escalation of complexity and multidimensional (internal and external) factors bring companies to a position where risk management should be of main concern. Enterprise Risk Management (ERM) adoption and the extent of ERM implementation is seen as a guaranteeing element to increase the value of the companies over the long term due to adequate risk awareness and risk management strategies in all relevant business functions. This study examines the extent of ERM implementation on the initial performance of companies in the Malaysian IPO market. Testing a sample of 105 Malaysian IPOs issued from January 2012 to December 2020 using a linear regression model, ERM sophistication is positively and significantly related to the initial performance of Malaysian IPOs, offering support to the proposition in this study. Equally important is the reciprocal of offer price, subscription ratio, and market condition, which are also significant factors in companies’ post-IPO performance. This study benefits the market regulators and investors on the importance of ERM sophistication to companies’ initial performance. Keywords: Enterprise Risk Management Initial Return Initial Public Offerings Malaysian IPO Market JEL: G12, G31 Introduction Enterprise risk management (ERM) is a company’s integrated risk management technique. Companies use a systematic risk management approach to determine, control, exploit, and mitigate risks from all sources to a company’s stakeholders (D’Arcy & Brogan, 2001). In other words, instead of the silo-based approach (managing risks individually) to manage a company’s risk (Hoyt and Liebenberg, 2011), ERM helps companies manage increasingly complex business risks coherently and comprehensively. The difference between traditional risk management and ERM is the oversight level of companies’ entire risk portfolio aligned with the companies’ strategic objectives instead of overseeing specific risks in isolation (Banham, 2004). Since risks can exist from various aspects of the business, including finance, operation and policies, it is necessary to manage risk holistically to gain direct N. Che-Yahya, S. S. Alyasa-Gan, R. Mohd-Rashid/ ACRN Journal of Finance and Risk Perspectives 11 (2023) 141-157 142 economic benefit rather than to only comply with the regulatory pressure (Pagach & Warr, 2011). From the perspective of ERM theory, ERM is an integrated risk management approach that helps the top management, such as the board of directors (BOD), to be familiar with managing uncertainty for effective decision-making (Bromiley et al., 2015). Implementing ERM enables the companies to stabilize earnings from the reduced cost of capital caused by duplication of risk management techniques (Farrell & Gallagher, 2015). In return, companies can create shareholders’ value and achieve better performance. ERM has received considerable attention as businesses are exposed to numerous competitive shocks, particularly in the emerged markets (Arena et al., 2010). The empirical literature analyzing whether ERM is related to companies’ performance can be seen to be primarily confined to the US market (Ahmed & Manab 2016; Callahan & Soileau 2017; Farrell & Gallagher 2015; Florio & Leoni 2017; Hoyt & Liebenberg 2011; Silva et al. 2019; Zou et al. 2019). Other studies (e.g., Baxter et al., 2013; McShane et al., 2011) use the European companies’ context to investigate the association between the determinants and quality of ERM systems. Only a few studies can be found examining the effectiveness of ERM on companies’ performance in emerging markets (Anton & Nucu, 2020). The studies are those from the Pakistani market (Khan & Ali, 2017) and China market (Wang et al., 2010; Zou & Hassan, 2017). Despite the mixed results, the predominant view is that the ERM approach enhances companies’ performance. One rationale behind this lack of empirical evidence on the relationship between ERM adoption and companies’ performance is the difficulty of explaining the ERM approach as a direct consequence of companies’ risk reduction (Ellul and Yerramilli, 2013; Nocco and Stulz, 2006). As a way to fill the research gap, this study aims to produce evidence on the influence of ERM adoption on companies’ performance in emerging markets, specifically in the Malaysian market. The implementation and effectiveness of the ERM approach on companies’ value and performance have also gained importance in different domains: financial services companies (Eckles et al., 2014; Grace et al., 2015), nonfinancial companies (Pagach & Warr, 2010; Spric et al., 2016) and small and medium enterprises (SMEs) (Strelcova et al., 2018; Thun et al., 2011). Nonetheless, it is paradoxically reported in ERM literature that most of the past studies on the influence of ERM on companies’ performance concentrate their context on listed companies only years after the companies’ existence in a stock market. Yet, Spric et al. (2016) argue that the investors’ reaction towards ERM adoption and sophistication is only for the short term. Thus, it provides the impetus to examine the relationship between the extent of ERM implementation and companies’ performance in the initial public offering (IPO) market. The selection of the IPO market is crucial as ERM’s sophistication and influence on companies’ performance should be estimated and understood earlier. IPO companies need to produce favourable performance upon listing as it indicates their potential sustainability and growth over the long run. Espenlaub et al. (2012) proposed that the longer the companies can sustain their position in the IPO aftermarket, companies would have the better opportunity to obtain continuous funds from public investors to capitalize on profitable future projects. Thus, an understanding of potential determinants (e.g. ERM sophistication) that could explain the performance of IPO companies is desired. Despite the extensive research conducted, the appraisal models and proxy in ERM have been criticized (Tan & Yang, 2022), due to the non-reflective representation of ERM to explain companies’ performance. This study is of the stand that the ERM sophistication systems (i.e., the extent of ERM adoption) as a whole, rather than just its adoption, will better contribute to the companies’ performance. Simultaneously, the extent of ERM sophistication N. Che-Yahya, S. S. Alyasa-Gan, R. Mohd-Rashid/ ACRN Journal of Finance and Risk Perspectives 11 (2023) 141-157 143 applied in companies offers comprehensive insights into the contribution of the ERM system to companies’ performance. Accordingly, ERM sophistication is measured using a two-step approach. First, four variables representing the ERM components are estimated. The four variables considered are the appointment of a chief risk officer (CRO), the presence of internal control and risk committee (ICR committee), the reporting frequency of the ICR committee to the board of directors (BoD) and the ERM operating mechanisms by focusing on risk assessment frequency, depth, and methodology. Second, an overall measure of ERM sophistication is created, encompassing all the estimated ERM components. A score of ERM sophistication as the sum of all previous indicators is created. The results will shed light on whether and how the ERM components, both separately and jointly, positively affect companies’ initial performance. Overall, this study responds to the call for more research in the ERM field and attempts to contribute to the limited insights into the relationship between ERM sophistication and the performance of companies in several ways. Theoretically, this study provides evidence to support the positive effect of ERM on improving companies’ initial performance. This study also contributes to ERM research by widening the set of measures and determinants of ERM sophistication, adding detailed characteristics of the risk assessment process to the traditional ERM proxies. Practically, this study offers insights to the shareholders and market regulators on the influence of ERM sophistication on companies’ performance in the Malaysian market, which is equipped with smaller companies and financial markets compared to the US market. The remaining sections of this paper are organized as follows; Section 2 reviews relevant literature. Section 3 describes the data and methodology. Section 4 presents and discusses the empirical results, while Section 5 concludes the findings. Literature review and hypotheses development Enterprise Risk Management (ERM) and performance of companies For companies to grow and develop, risk is sometimes unavoidable. Therefore, companies need to identify and manage risks to minimize threats and enhance opportunities (Institute of Risk Management, 2006). Various definitions of risk could be found, but ISO 31000:2009 defined risk as a deviation from the expected, which leads to uncertainty in acquiring an organization’s objective whereas “enterprise risks” might disrupt all company functions, whatever the sources or nature. Thus, a company should implement proper risk management to achieve its business objectives. According to the Committee of Sponsoring Organizations of the Treadway Commission (COSO, 2004), enterprise risk management (ERM) is “A process, ongoing and growing through an entity, effected by people at every level of an organization, applied in strategy setting, applied across the enterprise, at every level and unit, and includes taking an entity-level portfolio view of risk, designed to identify potential events that, if they occur, will affect the entity and to manage risk within its risk appetite, able to provide reasonable assurance to an entity’s management and board of directors, geared to the achievement of objectives in one or more separate but overlapping categories”. ERM should aim to comply with regulatory requirements, respond to opportunities and create value for the business organization in an integrated way (Anderson, 2005). Besides, ERM also helps top management manage N. Che-Yahya, S. S. Alyasa-Gan, R. Mohd-Rashid/ ACRN Journal of Finance and Risk Perspectives 11 (2023) 141-157 144 different types of risk exposure (Annamalah et al., 2018) and improve the companies’ performance (Florio & Leoni, 2017; Lechner & Gatzert, 2018). Previous researchers also found that ERM implementation will help enhance the companies’ value (Beasley et al., 2008; Hoyt & Liebenberg, 2011; Lechner & Gatzert, 2018). Callahan and Soileau (2017) found that companies with proper implementation of ERM practices would have better operational performance than those with minimal ERM practices. They also stated that companies with a more sophisticated ERM can benefit the shareholders with additional insights on risk assessment for future investment decisions. Similarly, Florio and Leoni (2017) and Zou and Hassan (2017) firmly stated a significant positive association between ERM practices and company performance. Enterprise risk management is deemed to enhance performance because it helps companies avoid losses, bankruptcy, and reputational costs (Baxter et al., 2013; Gordon et al., 2009; Pagach & Warr, 2010, 2011). Besides, ERM also improves companies’ decision-making (Farrell & Gallagher, 2014; Grace et al., 2015; Nocco & Stulz, 2006) and capital allocation processes (Baxter et al., 2013; Hoyt & Liebenberg, 2011). However, Gordon et al. (2009) claim that the relationship between ERM and companies’ performance depends upon companies’ specific factors, including environmental uncertainty, industry, company size, and BoD activity. Furthermore, Beasley et al. (2008) find CRO appointments to have positive equity market reactions for non-financial companies but not financial companies. Hoyt and Liebenberg (2011) also find a positive relationship between company value and CRO appointment in a study focusing on US insurance companies. On the other hand, Grace et al. (2015) found that the presence of a CRO has no incremental effect on the operating performance. On top of that, the risk committee, which is usually a proxy of ERM sophistication, tend to exist in companies with strong board structures (Subramaniam et al., 2009; Yatim, 2010). Existing literature acknowledges that active BoD participation is positively related to an effective ERM system (Sobel & Reding, 2004). Companies with an engagement from the top of advancing risk-based decision-making at every level would have established sophisticated and mature ERM programs. In addition to the evidence, Farrell and Gallagher (2015) agree that companies with matured levels of ERM exhibit higher value in the stock market. McShane et al. (2011) conclude a positive relationship between risk management advancement from a silo-based to an ERM approach and company value. However, there is no additional increase in value for companies moving to an even further ERM sophistication. Thus, we hypothesize: H1: Companies with higher ERM sophistication will increase companies’ initial performance Other determinants of performance of companies Given that the initial performance of companies has been extensively examined, several variables are significant in explaining the initial return of IPOs. Among all, reciprocal of offer price (Abdul-Rahim & Yong, 2010; Mohd-Rashid et al., 2014), subscription ratio (Abdul Rahman & Che-Yahya, 2019; Mohd-Rashid et al., 2019), company size (Wong et al., 2017; Yan et al., 2019), market condition (Chung et al., 2017; Tsukioka et al., 2018), underwriter reputation (Albada et al., 2018; Badru & Ahmad-Zaluki, 2018) and sector (Kwon & Yin, 2006; Yan et al., 2019) are the determinants that are usually adopted by past studies. N. Che-Yahya, S. S. Alyasa-Gan, R. Mohd-Rashid/ ACRN Journal of Finance and Risk Perspectives 11 (2023) 141-157 145 Reciprocal of offer price: Companies face increasing complexity and scope of risks (Nocco & Stulz, 2006). According to the trade-off hypothesis between risks and returns in an IPO market, the reciprocal of offer price can serve as an actual reflection of risks associated with the IPO (Bradley & Jordan, 2002). Studies argue that because the offer price is set before the conduct of the IPO, the market influence on the offer price is minimal, making it another good risk indicator. In line with the argument, Che-Yahya and Matsuura (2019) found a negative relationship between the reciprocal of offer price and companies’ initial performance. IPOs with lower prices are said to be highly under-priced due to higher risk (Pu & Wang, 2015). Thus, since investors are generally risk-averse, they avoid subscribing to shares with higher risk, negatively affecting the companies’ initial performance. Accordingly, we hypothesize: H2: Higher reciprocal of offer price will decrease companies’ initial performance Subscription ratio: Other than the reciprocal of offer price, subscription ratio (also called IPO demand) is another common determinant of companies’ initial performance. A higher subscription ratio usually indicates a higher quality of the IPO. Past studies such as Tajuddin et al. (2016) and Mohd-Rashid et al. (2014) found a positive relationship between subscription ratio and initial performance. The studies argue that having a higher subscription ratio is crucial to instilling confidence among investors towards the companies’ success. Subsequently, it may lead to a favourable performance post-IPO. Thus, we hypothesize: H3: Higher subscription ratio will increase companies’ initial performance Company size: Another relevant determinant for initial performance examined in the literature is the company size, i.e., issue size. Issue size portrays ex-ante uncertainty of companies’ value (Schultz, 1993). Iwasaki and Koenda (2019) found that companies with higher issuance are associated with higher risk due to the complexities of managing large-scale operations. The complexities of managing larger companies may lead to possible underutilized resources, inducing uncertainty among investors toward companies’ post-IPO performance. As a result, past studies (Ahmad et al., 2021; Moosa, 2010) found a negative relationship between issue size and companies’ initial performance. Hence, we hypothesize: H4: Higher issue size will decrease companies’ initial performance Market condition: Several ways can be measured to represent market conditions (KLCI or hot and cold), but generally, having the right market condition can increase the possibility of having a higher initial return (Saleh & Che-Yahya, 2021). However, a high market condition results from optimism among market players. This will encourage investors to view the present market’s outlook with a higher average initial return, encouraging them to sell their shares immediately (Chong et al., 2009; Ritter & Welch, 2002). Thus, leading to a negative implication on companies’ initial performance. Consistent with the prior argumentation, we hypothesize: N. Che-Yahya, S. S. Alyasa-Gan, R. Mohd-Rashid/ ACRN Journal of Finance and Risk Perspectives 11 (2023) 141-157 146 H5: Higher market condition will decrease companies’ initial performance Underwriter reputation: Having reputable underwriters can reduce the problem of information asymmetry and can reflect the quality of the companies (Wong et al., 2017). For instance, a prestigious underwriter’s reputation could signal the risk magnitude of the company to potential investors with limited information (Rumokoy et al., 2017). Reputable underwriters indicate that the companies are good and safe to invest in, increasing the credibility of the companies. Thus, it increases the investors’ confidence, making the underwriters increase the share price. Consequently, the higher share price will lead to a higher initial return (Albada et al., 2018; Wong et al., 2017; Abdul Rahman & Che-Yahya, 2019). Hypothetically, we assume: H6: Higher underwriter reputation will increase companies’ initial performance Sector: Among all sector types, the most frequently adopted companies’ sector is the technology and nontechnology sector (Ahmad-Zaluki & Badru, 2020; Kwon & Yin, 2006; Saleh & Che-Yahya, 2021; Yan et al., 2019). While the technology sector is commonly associated with higher risk due to the possible low acceptance of innovations and inventions from investors, they also possess favourable prospects from positive growth opportunities. Ahmad-Zaluki and Badru (2020) support the argument where the study found that most IPOs with the highest intention to grow and allocate the highest IPO proceeds to growth opportunities are those from the technology sector. Thus, since growth resembles possible wealth accumulation for the investors, wealth-centred investors become motivated to subscribe to the shares, resulting in higher initial return post-IPO. Therefore, we hypothesize: H7: Companies from the technology sector will increase companies’ initial performance Methodology The sample, variables definition and empirical regression model This study employs 105 IPOs listed in the Main Market and ACE Market of Bursa Malaysia from 2012 to 2020. There is very limited information on ERM for companies listed from 2000 to 2011, resulting in excluding the companies and starting the sample in 2012. The performance of companies is captured from the companies’ initial performance on the stock market, measured by initial returns of offer-to-open. The ERM sophistication is measured by the two-steps approach proposed by Florio and Leoni (2017). The two-steps approach is as follows: 1. Scores are generated for individual ERM components. Four variables representing the different ERM components are estimated. The four variables considered are the appointment of a Chief Risk Officer, the presence of internal control and risk committee (ICR committee), the reporting frequency of the ICR committee to the board of directors (BoD) and the ERM operating mechanisms by focusing on risk assessment frequency, depth, and methodology. A dummy variable of “1” and “0” otherwise for ERM score is derived if a company meet a minimum requirement of the individual ERM component. All information on ERM components will be N. Che-Yahya, S. S. Alyasa-Gan, R. Mohd-Rashid/ ACRN Journal of Finance and Risk Perspectives 11 (2023) 141-157 147 sourced from the companies’ prospectus. The total score for the ERM sophistication is from 0 (if no adoption) to 4 (full adoption). 2. An overall measure of ERM sophistication is created, encompassing all the ERM components estimated. The ERM sophistication score is summed from all previous indicators using the value of “0” to “4”. A dummy variable for ERM sophistication is derived (ERM advanced) equal to “1” if the ERM score is equal to or higher than 3, and “0” otherwise. Control variables included are reciprocal of the offer price, investors’ perception captured in the pre-market measured by subscription ratio on shares of a listed company, issue size measured by the companies’ issue size during the listing, market condition measured by the Kuala Lumpur Composite Index (KLCI), underwriter reputation measured by the market share of investments banks and dummy sector with “1” for the technology sector and “0” otherwise. The definition of all variables is summarized in Table 1. A quantitative research technique is adopted to address its objectives and hypotheses. In specific, this study estimates the multivariate OLS regressions while controlling for several specific factors. The regression model is as in Equations 1 and 2. Table 1. Summary of Operational Definition of Variables Variables Definitions Initial Return 𝐼𝑅𝑂𝑃𝐸𝑁 = [(𝑃𝑂𝑝𝑒𝑛𝑖𝑛𝑔/𝑃𝑂𝑓𝑓𝑒𝑟) – 1] 𝑋 100 Dummy ERM Sophistication DES = 1 ERM score 3 to 4 0 ERM score 0 to 2 Total ERM Sophistication 𝑇𝐸𝑆 = 𝐸𝑅𝑀 𝑠𝑜𝑝ℎ𝑖𝑐𝑡𝑖𝑐𝑎𝑡𝑖𝑜𝑛 𝑠𝑐𝑜𝑟𝑒 0 𝑡𝑜 4 – 0 indicates no adoption and 4 indicates maximum adoption. Reciprocal of offer price 𝑅𝐸𝐶𝐼𝑃 = (1/𝑃𝑂𝑓𝑓𝑒𝑟) Subscription Ratio 𝑂𝑆𝑅 = 𝑆𝑢𝑏𝑠𝑐𝑟𝑖𝑏𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠/𝑁𝑂𝑆𝐼 Company Size 𝐼𝑠𝑠𝑢𝑒 = 𝐿𝑛(𝑁𝑂𝑆𝐼 𝑋 𝑃𝑂𝑓𝑓𝑒𝑟) Market Condition 𝑀𝐾𝑇𝐶𝑂𝑁 = (𝐾𝐿𝐶𝐼1− 𝐾𝐿𝐶𝐼0) /𝐾𝐿𝐶𝐼0 Underwriter Reputation 𝑈𝑁𝐷𝐸𝑅𝑊𝑅𝐼𝑇𝐸𝑅 = (𝑈𝑁𝐷𝑇/𝑇𝑂𝑇𝑈𝑁𝐷𝑇) – underwriting amount for each investment bank in a listing year divided by the total underwriting amount in a listing year Dummy Sector DS = 1 Technology 0 Other sectors Notes: KLCI is Kuala Lumpur Composite Index, POpening is opening price, POffer is offer price, NOSI is number of shares issued. 𝐼𝑅𝑂𝑃𝐸𝑁 = 𝛼 + (𝛽1𝑇𝐸𝑆𝑖+ 𝛽2𝑅𝐸𝐶𝐼𝑃𝑖+ 𝛽3𝑂𝑆𝑅𝑖+ 𝛽4𝐼𝑆𝑆𝑈𝐸𝑖+ 𝛽5𝑀𝐾𝑇𝐶𝑂𝑁𝑖 +𝛽6𝑈𝑁𝐷𝐸𝑅𝑊𝑅𝐼𝑇𝐸𝑅𝑖+ 𝛽7𝐷𝑆𝑖+ 𝜀𝑖 (1) 𝐼𝑅𝑂𝑃𝐸𝑁 = 𝛼 + (𝛽1𝐷𝐸𝑆𝑖+ 𝛽2𝑅𝐸𝐶𝐼𝑃𝑖+ 𝛽3𝑂𝑆𝑅𝑖+ 𝛽4𝐼𝑆𝑆𝑈𝐸𝑖+ 𝛽5𝑀𝐾𝑇𝐶𝑂𝑁𝑖 +𝛽6𝑈𝑁𝐷𝐸𝑅𝑊𝑅𝐼𝑇𝐸𝑅𝑖+ 𝛽7𝐷𝑆𝑖+ 𝜀𝑖 (2) N. Che-Yahya, S. S. Alyasa-Gan, R. Mohd-Rashid/ ACRN Journal of Finance and Risk Perspectives 11 (2023) 141-157 148 Results Descriptive statistics analysis Appendix 1 presents the descriptive statistics of the variables in the final sample of 105 IPO companies listed in the Malaysian market from 2012 to 2020. The mean of initial return, which is the companies’ performance reports 20.77%, ranging from a minimum of -55.47% to a maximum of 154.35%. The positive mean value indicates that companies in the Malaysian market can make positive initial returns on their first trading day. The initial return found is comparable to other studies in the Malaysian market. In comparison, 31.65% were reported by Abdul-Rahim et al. (2012), 29.44% reported by Mohd-Rashid et al. (2014), and 16.40% reported by Yong (2019). Nevertheless, it is observable that there is a declining pattern in companies’ initial performance. It indicates that investors in the Malaysian market are gaining comparatively lower returns on the first trading day of the IPOs. The standard deviation of 37.73% demonstrates that companies’ share price is volatile, reflecting the risk of investment on the first trading day. Meanwhile, ERM adoption is minimal during the companies’ listing. It is observed from the mean and median of 0.49 and 0 for dummy ERM sophistication and 1.70 and 1 for Total ERM sophistication, respectively. The median results show that more than half of the sample do not or only adopt at least one ERM approach to manage their risks. The enormous difference between the mean and the maximum for both ERM sophistication measurements simply pictures the reality of companies’ minor exposures towards managing risk holistically. Unlike the US market, where the adoption and implementation of ERM are higher (Anton & Nucu, 2020), Malaysian companies lack a robust ERM approach that can ensure their operations are well-functioning. The results are in line with the issue raised in the Introduction section, whereby the adoption of ERM in companies seeking listing is still scarce, especially in emerging markets like Malaysia. Thus, it supports the conjecture on the importance of examining the possible relationship between ERM sophistication and companies’ initial performance. Correlation analysis This study checks for any existence of severe multicollinearity issues in the regression model. Using the Pearson Correlation Coefficient test, the highest correlation between independent variables in both models is between the reciprocal of offer price and issue size, at 0.6047 (refer to Appendix 2 and 3). However, according to Asteriou and Hall (2015), the correlation between variables is considered severe if it exceeds 0.9, indicating that no severe multicollinearity issue exists in the regression model. N. Che-Yahya, S. S. Alyasa-Gan, R. Mohd-Rashid/ ACRN Journal of Finance and Risk Perspectives 11 (2023) 141-157 155 Appendices DESCRIPTIVE STATISTICS ANALYSIS INITIAL RETURN (%) DUMMY ERM SOPHISTICATION (UNIT) TOTAL ERM SOPHISTICATION (UNIT) RECIPROCAL OF OFFER PRICE SUBSCRIPTION RATIO (UNIT) ISSUE SIZE (RM) MARKET CONDITION (KLCI) (%) UNDERWRITER REPUTATION (%) DUMMY SECTOR (UNIT) Mean 20.77 0.49 1.70 2.39 21.26 372,000,000.00 0.05 7.08 0.12 Median 13.04 0.00 1.00 1.79 13.05 58,631,040.00 0.39 2.50 0.00 Maximum 154.35 1.00 4.00 8.33 136.10 7,690,000,000.00 10.57 57.29 1.00 Minimum -55.47 0.00 0.00 0.13 -0.50 2,576,160.00 -7.48 0.01 0.00 Std. Dev. 37.73 0.50 1.77 1.85 22.72 1,050,000,000.00 2.49 9.98 0.33 N. Che-Yahya, S. S. Alyasa-Gan, R. Mohd-Rashid/ ACRN Journal of Finance and Risk Perspectives 11 (2023) 141-157 156 CORRELATION ANALYSIS (TOTAL SCORE) Initial Return Total Score Reciprocal of Offer Price Subscription Ratio Log Issue Size Market Condition (KLCI) Underwriter Reputation Dummy Sector Initial Return 1.0000 0.1046 0.4364 0.4140 -0.3440 -0.2117 -0.0435 0.0106 Total Score 0.1046 1.0000 -0.0192 -0.1598 -0.0222 -0.0435 0.0410 0.0816 Reciprocal of Offer Price 0.4364 -0.0192 1.0000 0.3176 -0.6027 0.01990 -0.2280 0.1108 Subscription Ratio 0.4140 -0.1598 0.3176 1.0000 -0.3188 -0.0995 -0.1941 -0.1520 Log Issue Size -0.3440 -0.0222 -0.6027 -0.3188 1.0000 0.0749 0.4802 -0.1075 Market Condition (KLCI) -0.2117 -0.0435 0.0199 -0.0995 0.0749 1.0000 0.0463 0.1128 Underwriter Reputation -0.0435 0.0410 -0.2280 -0.1941 0.4802 0.0463 1.0000 -0.0912 Dummy Sector 0.0106 0.0816 0.1108 -0.1520 -0.1075 0.1128 -0.0912 1.0000 N. Che-Yahya, S. S. Alyasa-Gan, R. Mohd-Rashid/ ACRN Journal of Finance and Risk Perspectives 11 (2023) 141-157 157 CORRELATION ANALYSIS (DUMMY ERM SOPHISTICATION) Initial Return Dummy ERM Sophistication Reciprocal of Offer Price Subscription Ratio Log Issue Size Market Condition (KLCI) Underwriter Reputation Dummy Sector Initial Return 1.0000 0.1126 0.4364 0.4140 -0.3440 -0.2117 -0.0435 0.0106 Dummy ERM Sophistication 0.1126 1.0000 0.0059 -0.1684 -0.0660 -0.0157 0.0594 0.0975 Reciprocal of Offer Price 0.4364 0.0059 1.0000 0.3176 -0.6027 0.0199 -0.2280 0.1108 Subscription Ratio 0.4140 -0.1684 0.3176 1.0000 -0.3188 -0.0995 -0.1941 -0.1520 Log Issue Size -0.3440 -0.0660 -0.6027 -0.3188 1.0000 0.0749 0.4802 -0.1075 Market Condition (KLCI) -0.2117 -0.0157 0.0199 -0.0995 0.0749 1.0000 0.0463 0.1128 Underwriter Reputation -0.0435 0.0594 -0.2280 -0.1941 0.4802 0.0463 1.0000 -0.0912 Dummy Sector 0.0106 0.0975 0.1108 -0.1520 -0.1075 0.1128 -0.0912 1.0000