An examination of the factors accounting for initial public offering underpricing in Korea exchange

Abstract

Historical research has shown that large positive abnormal returns are always generated during the period immediately following issuance of IPOs. This paper will re-examine the existence of IPO underpricing in Korea Exchange in 2010, determine the impact of multiple factors on the degree of IPO underpricing, and discuss how these factors affect the degree of IPO underpricing in the Korea Exchange. The factors include the insider holding percentage, firms' systematic risk, total issue amount, underwriters' reputation ranking, and IPO age of the issue firms. The results of this research show that insider holding percentage, total issue amount, and IPO age influence the underpricing of IPOs. The large insider holding percentage and total issue amount usually contributes to a lower degree of underpricing. The mature firm's IPO stocks would have more possibility to be priced correctly. Finally, because of the limitation of the research and models, the test result may not be accurately for IPOs forecast in the Korea Exchange.