Asia-Pacific Journal of Business (아태비즈니스연구)

KNU The Institute of Management & Economy Research (강원대학교 경영경제연구소)
권호 표지

Overpricing of Intial Public Offering: Evidence from Korea Market

고평가 신규공모에 관한 연구: 국내 신규공모주 가격 분석

  • Lee, Jong-Ryong (College of Business Administration, Kangwon National University)
  • Received : 2017.11.30
  • Accepted : 2017.12.22
  • Published : 2017.12.30
Download PDF
⟨ Previous Next ⟩

Abstract

Initial public offering (IPO) has been well known to be underpriced initially and under-performed in the long run. However, whether an IPO is underpriced or not strongly depends on how to measure the fair value. This paper hand collects data of IPOs newly listed in Korea market when whether IPO is overpriced or not is clearly distinguishable. The overpriced IPO refers to as the one the underwriters buy back after the listing. With the data, the paper examines that IPOs are overpriced and that the characteristics are related to the underpricing at the aftermarket dates and the performance in the long run. The data of clearly overpriced IPOs are little available from other IPO markets like US IPO market. From the data of IPOs listed under the underwriting rule of market stabilization, the results obtainable are the followings. First of all, the average initial return 70% of the underpriced IPO at the aftermarket dates is greater than the one 40% of the overpriced one. The overpriced IPOs are priced highly over the mid prices of the price bands at the pricing dates and then supported by relatively higher subscription rates of individual investors. The probit analyses moreover report that individual investors do not distinguish the overpricing of IPOs from the underpricing. These imply that the overpricing is strongly affected by the underwriting rule on the initial pricing.

Keywords

References

  1. Aggarwal, R. (2000), "Stabilization Activities by Underwriters After Initial Public Offerings", Journal of Finance, 55, 1075-1103. https://doi.org/10.1111/0022-1082.00241
  2. Aggarwal, R. and P. Rivoli (1990), "Fads in the IPO Market?," Financial Management, 19, 45-57. https://doi.org/10.2307/3665609
  3. Benveniste, L. M. and P. A. Spindt (1989), "How Investment Bankers Determine the Offer Price and Allocation of New Issues", Journal of Financial Economics, 24, 343-361. https://doi.org/10.1016/0304-405X(89)90051-2
  4. Choi, M. S. (2011). "Review of Empirical Studies on IPO Activity and Pricing Behavior in Korea," Asian Review of Financial Research, 24, 621-663.
  5. Cornelli, F., D. Goldreich, and A. Ljungqvist (2006), "Investor Sentiment and Pre-IPO Markets", Journal of Finance, 61, 1187-1216. https://doi.org/10.1111/j.1540-6261.2006.00870.x
  6. Dawson, S. M. (1987), "Initial Public Offer Underpricing: The Issuer's View-A Note," Journal of Finance, 42, 159-162.
  7. Demers, E., and P. Joos (2007). "IPO Failure Risk,". Journal of Accounting Research, 45, 333-371. https://doi.org/10.1111/j.1475-679X.2007.00236.x
  8. Ibbotson, R. G. (1975), "Price Performance of Common Stock New Issues," Journal of Financial Economics, 2, 235-272. https://doi.org/10.1016/0304-405X(75)90015-X
  9. Kim, J. W. and J. R. Lee (2010), "Earning Management and the Long-run Performance of Initial Public Offering Firms", Journal of Industrial Economics and Business, 23, 357-384.
  10. Kim, J. W. and J. R. Lee (2011), "R&D Investment on Anomalies of Initial Public Offering Firms", Journal of Industrial Economics and Business, 24, 2649-2670.
  11. Lee, J. R. and J. W. Kim (2009), "The Effect of Non-Trading Period on IPO Underpricing in Korean Stock Market", Asian Review of Financial Research, 22, 1-34.
  12. Lee, J. R. and S. W. Joh (2007). "Initial Returns of IPO Firms and Put back Options," Asia-Pacific Journal of Financial Studies, 36, 657-694.
  13. Loughran, T. and J. Ritter (1995), "The New Issues Puzzle," Journal of Finance, 50, 23-51. https://doi.org/10.1111/j.1540-6261.1995.tb05166.x
  14. Mauer, D. C. and L. W. Senbet (1992), "The Effect of the Secondary Market on the Pricing of Initial Public Offerings: Theory and Evidence," Journal of Financial and Quantitative Analysis, 27, 55-79. https://doi.org/10.2307/2331298
  15. Myers, S. C. and N. S. Majluf (1984), "Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have", Journal of Financial Economics, 13, 187-221. https://doi.org/10.1016/0304-405X(84)90023-0
  16. Purnanandam, A. K. and B. Swaminathan (2004), "Are IPOs Really Underpriced?", Reviews of Financial Studies, 17, 811-848. https://doi.org/10.1093/rfs/hhg055
  17. Ritter, J. R. (1991), "The Long-Run Performance of Initial Public Offerings," Journal of Finance, 46, 3-27. https://doi.org/10.1111/j.1540-6261.1991.tb03743.x
  18. Ritter, J. R., and I. Welch (2002). "A Review of IPO Activity, Pricing, and Allocations.," Journal of Finance, 57, 1795-1828. https://doi.org/10.1111/1540-6261.00478
  19. Rock, K. (1986), "Why New Issues Are Underpriced", Journal of Financial Economics, 15, 187-212. https://doi.org/10.1016/0304-405X(86)90054-1
  20. Ruud, J. S. (1993), "Underwriter Price Support and the IPO Underpricing Puzzle," Journal of Financial Economics, 34, 135-151. https://doi.org/10.1016/0304-405X(93)90015-4
  21. Schultz, P. H. and M. A. Zaman (1994), "Aftermarket Support and Underpricing of Initial Public Offerings", Journal of Financial Economics, 35, 199-219. https://doi.org/10.1016/0304-405X(94)90004-3
  22. Sherman, A. E. (2000), "IPOs and Long-Term Relationships: An Advantage of Book Building", Review of Financial Studies, 13, 697-714. https://doi.org/10.1093/rfs/13.3.697
  23. Teoh, S. H., I. Welch and T. J. Wong (1998), "Earnings Management and the Long-Run Market Performance of Initial Public Offerings", Journal of Finance, 53, 1935-1974. https://doi.org/10.1111/0022-1082.00079
  24. Welch, I. (1989), "Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings", Journal of Finance, 44, 421-449. https://doi.org/10.1111/j.1540-6261.1989.tb05064.x
  25. Zheng, S. X. (2007). "Are IPOs Really Overpriced?". Journal of Empirical Finance, 14, 287-309. https://doi.org/10.1016/j.jempfin.2006.06.001