Pre-IPO Financial Performance and IPO Success: Evidence of a U-Shaped Relationship

This study examines how pre-IPO financial performance affects IPO success in the Korean capital market. Drawing on signaling theory, we hypothesize U-shaped relationships between IPO success and three dimensions of financial performance: profitability, stability, and activity. Using data from 299 manufacturing firms that conducted IPOs on KOSPI and KOSDAQ markets between 2012 and 2019, our empirical results confirm that all three financial performance dimensions exhibit significant U-shaped relationships with IPO success. Both very weak and very strong pre-IPO financial performance are associated with higher IPO valuations, whereas intermediate levels receive comparatively lower valuations. These findings reveal that financial performance signals different types of growth potential depending on its level: low performance signals unrealized growth potential from prior investments, while high performance signals proven revenue-generating capability and scalability.