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- Title
MOTIVES FOR GOING PUBLIC AND UNDERPRICING: NEW FINDINGS FROM KOREA.
- Authors
Jeong-Bon Kim; Krinsky, Itzhak; Lee, Jason
- Abstract
In this paper we empirically examine the degree of underpricing and its determinants when issuers may have different motives for going public. In particular, we investigate the validity of hypothesized relationships between underpricing and potential proxies for ex ante uncertainty of a new issue by utilizing data from the Korea Stock Exchange (KSE). We also examine whether or not underpricing is systematically related to other potential signalling variables. Many previous studies have tested IPO signalling models (e.g., Downes and Heinkel, 1982; Ritter, 1984; and Krinsky and Rotenberg, 1989). Their primary objective, however, is the valuation of an IPO firm. By focusing on the degree of underpricing, the paper addresses investors' main concern which is the rate of return on their investment rather than total firm value. Finally, we demonstrate that theoretical models and empirical regularities reported in the North American markets may not hold in an environment with different institutional arrangements. <BR> In this study we present evidence that the initial stock price performance is substantially lower when existing shareholders, at least partially, intend to diversify their holdings than when entrepreneurs view the IPO as a last resort for raising funds to finance their investment projects. Furthermore, the results of our analysis indicate that the impact of various explanatory variables on underpricing is significantly different for each motive. To preview, we present evidence that bivariate signalling models developed by Grinblatt and Hwang (1989) and Welch (1989) are not robust to the different motives for going public. <BR> These models are applicable only when existing shareholders intend to diversify their holdings. On the other hand, various proxies for ex ante uncertainty are significantly related to the degree of underpricing regardless of issuers' motives.
- Subjects
SOUTH Korea; GOING public (Securities); STOCK exchanges
- Publication
Journal of Business Finance & Accounting, 1993, Vol 20, Issue 2, p195
- ISSN
0306-686X
- Publication type
Article
- DOI
10.1111/j.1468-5957.1993.tb00659.x