Group Affiliation's Effect on Valuation and Performance of IPO Firms: Evidence on Korean Chaebols

Abstract

This paper examines the impact of chaebol-group membership on the firm valuation and performance upon initial public offering in Korea during the period from 2002 to 2008. When IPO firms are valued on the basis of their offered prices using price-earnings ratio or price-sales ratio method, we find no systematic difference in the valuation between chaebol-affiliated and independent firms. Contrary to the previous research on Japanese and Indian IPOs, however, we fail to find evidence that the IPOs of group-affiliated firms exhibit higher first trading day's returns than those of independent firms. Unlike Japanese Keiretsu case, Korean IPOs of chaebol firms are not more complex than those from stand-alone firms. While examining the one-year performance following IPOs for both chaebol-affiliated and independent firms we find that the one-year performance of independent firms is worse than that of stock market index. However, the one-year post- IPO performance from chaebol firms is not necessarily worse than that of stock market index.