Valuation and Underpricing of IPOs in Korea
- Valuation and Underpricing of IPOs in Korea
- Cho, Seong-Ho; Lee, 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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