Review of Empirical Studies on IPO Activity and Pricing Behavior in Korea

This paper reviews the hypotheses and empirical evidence that have been proposed to explain IPO activities and pricing behavior in Korea. The paper particularly reviews empirical evidence and explanations related to the three patterns associated with Korean IPOs: underpricing, hot issue markets, and long-run underperformance. Explanations for underpricing can be grouped under two broad categories: deliberate underpricing and behavioral approaches. The first category can be divided into two subcategories: asymmetric information and price stabilization. While the first subcategory attempts to explain underpricing in the efficient market framework and consider it as a part of the costs associated with IPOs, the last subcategory turns to one of the services that underwriters use to provide price stabilization. While the hypotheses based on asymmetric information are well established and supported by the literature, the significant variation in the degree of underpricing over time together with the poor long-term performance makes many researchers doubtful whether information-based theories could be enough to explain the large initial returns. Some researchers thus turn to behavioral explanations which put more emphasis on the effect of investors’ irrational behavior or sentiment on stock prices. Evidence suggests that no hypothesis can dominantly explain large initial returns. Thus the hypotheses reviewed here are not mutually exclusive and a given hypothesis can be more relevant to some IPOs than to others.