Introduction An Initial Public Offering IPO is commonly perceived as one of the most

590 their holdings in the company and utilize the funds generated to diversify their personal portfolio and pursue new ventures at the company level. Reflecting the importance of this going public decision of a company, there has been numerous empirical literatures focusing prominently on IPO. However, these literatures have surprisingly ignored the investigation to the actual utilization of proceeds from this IPO. As an alternative, the majority of them discuss about the under pricing, the long-run performance, and the time- clustering of IPOs Ibbotson, Sindelar, Ritter, 1994; Jenkinson Ljungqvist, 2001; or Ritter, 2003. In addition, most corporate finance literatures limit themselves to describing the institutional aspects of this decision, providing only a few remarks on the investigation of the actual utilization of the generated IPO funds. As a matter of fact, this information is very useful for the investors to make optimal investment decisions because this particular information can enable them to have a better view on how the company actually utilizes their money to increase the shareholder‘s wealth. Moreover, this growing significance in the decision of a company to go public can be considered as particularly high in Indonesia. As the evidence, according to the data from the Indonesia Stock Exchange IDX, the ratio of market capitalization to the Gross Domestic Products GDP in Indonesia is relatively low 14.7 in 2002, 29.4 in 2005, 37 in 2006, and 53 in 2007 being compared to other Asian countries like Malaysia and Singapore, which ratios have exceeded 200. 81 However, it can be seen that this ratio keeps increasing from year to year, which depicts the growing potential of capital markets in Indonesia that is very considerable. Accordingly, capital markets 81 Source: Danareksa Research Institute, Analisa Faktor Pencetus Voluntarily Delisting di Pasar Modal Indonesia 2007. Retrieved December 27, 2007, from http:www.danareksa-research.com 591 have recently become an important source of financing for companies in Indonesia and many investors have perceived capital markets as an attractive place to put their money in. This positive signal means that capital markets can already give a contribution to the economic growth in Indonesia. This study looks at the changes in the financial flexibility and investment following IPOs. It is found that Indonesian IPO companies utilize their IPO generated fund to finance their future investment, not to enhance their financial flexibility. In addition, instead of reducing their long term debt following the IPOs, these companies even use more long term debt in the post-IPO periods. Further investigation reveals that there is a positive relationship between the amount of funds raised in the IPOs and the decision to increase leverage at the one year after the IPOs. Finally, it is found that the IPO firms in this study rely heavier on the equity financing than debt financing to fund their investment in real assets. The results of this part of the study supports the findings of Mikkelson et al. 1997 and Kim and Weisbach 2006 that the motive for the companies to go IPO is to raise capital for investment. The remainder of this paper is organized as follows. Section Two contains the data used in this study. Section Three reports the empirical results on the use of IPO raised funds of new public firms in Indonesia. Section Four discusses the investing activities of IPO firms after becoming public firms. Section Five documents the relationship between the amount of funds raised in the IPOs and the decision to increase leverage at the one year after the IPOs. The last section offers the final conclusions on this study. 592

2. Data

The initial samples in this study consist of all firms that conducted Initial Public Offering within year 2000 to 2005 at the Indonesia Stock Exchange IDX. The IDX Annual Statistics publication was the source to collect the initial sample. There were 96 firms conducted IPOs during the sample periods of this study. To be included in the final sample, those 96 IPO firms have to meet several requirements, as follows: 1. Not companies classified into finance industry. Thus, 28 IPO companies are excluded due to this requirement. 2. Not state-owned enterprises SOEs. This study limits to firms that conducted primary offerings only. During the sample period of this study, Indonesian government sold 5 SOEs to public as part of privatization program, among other things, for state budget deficit relief following the 1997 Asian Financial Crisis. 3. Have a complete set of financial data required to estimate Working Capital Requirements WCR, Gross Property, Plant, and Equipment PPE, Net Liquid Balance NLB, Long Term Debt Leverage, and Growth Opportunities, and Total Assets at the 1 year before and after the IPOs. Ten IPO companies were further eliminated since they do not have complete data available to be further used in this study. In total, there are 43 of IPO firms excluded from the final sample. This leaves the final sample with 53 IPO companies from 8 industry sectors, as depicted in the Table 1 below: Table 1 IPO Companies and Industry Sectors Industry Sectors 2000 2001 2002 2003 2004 2005 Total Agriculture 1 1 1 3 Mining 1 3 4 Basic Industry and Chemicals 2 4 1 1 8 Miscellaneous Industry 1 1 1 1 1 1 6 Consumer Goods Industry 1 1 Property, Real Estate Building Construction 3 3 6 593 Infrastructure, Utilities Transportation 1 1 2 4 Trade, Services Investment 10 7 3 1 21 Total 7 21 13 2 6 4 53 Table 1 above shows that the final samples of this study mostly consist of firms from Trade, Services, Investment sector. This sector counts for more than 39 21 out of 53 IPOs of the total sample. The smallest numbers of IPOs come from the Agriculture and Consumer Goods Industry, which are only around 2 1 out of 53 IPOs. Moreover, the final samples in this study are dominated by IPOs done in the period of 2001, which are also made up of more than 39 21 out of 53 IPOs of the total IPOs across the sample periods. Year 2003, however, is the period with the least number in the sample. Only around 4 2 out of 53 IPOs comes from year 2003. Table 2 Descriptive Statistics Mean Min. Max. Std. Dev. ROA 7 -124 254 39 Leverage 1.57 0.00 69.87 9.59 Size IDR billion 326 10 6,474 937 ROA is calculated by dividing a company‘s annual net income by its total assets, in a year before IPO. Leverage is calculated by dividing a company‘s long term debt by its equity, in a year before IPO. Size is the value of the total assets prior to the IPO year, expressed in Indonesian Rupiah IDR billion. Table 2 above shows that IPO companies in this study one year before going public, on average, book for 7 in their ROA, with the maximum and minimum of 254 and -124, respectively. PT Multistrada Arah Sarana Tbk was the company that had the highest ROA prior to its IPO in 2005. On the other hand, PT Metamedia Technologies Tbk was the company with the lowest ROA prior to its IPO in 2001. Furthermore, table 2 above also shows that the sample IPO companies have varying levels of leverage. The average