Valuation and Underpricing of IPOs in Korea

Valuation and Underpricing of IPOs in Korea
Cho, Seong-HoLee, Jinsoo
Underpricing; Valuation of IPOs; Business Group; Tunneling; Propping
Issue Date
Series/Report no.
KDI Working Paper Series;09-23
In this paper, we study the impact of corporate governance on the valuation and underpricing of Initial Public Offerings (IPOs) in Korea during the period 2002 - 2008. Especially, we examine the effect of group membership on the valuation and underpricing of IPOs from group-affiliated firms. We find that the average of abnormal returns on the first trading day is higher for the IPOs from group-affiliated firms than for those from non-group firms. Since the IPOs from group-affiliated firms exhibit more severe underpricing than those from non-group firms, we interpret our finding as evidence that investors are more concerned about tunneling rather than valuing the possibility of future propping for group-affiliated firms. However, when we compare the relative valuation of IPOs using three valuation ratios and Tobin’s Q, we find evidence that the valuation of IPOs from group-affiliated firms is higher than that from non-group members, which is more consistent with tunneling hypothesis. Our mixed results indicate that a further study on this issue is warranted with more detailed information on the governance structure of group and non-group firms in Korea.
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