Unintended Regulatory Consequences: Evidence from the Korean IPOs
39 Pages Posted: 28 Oct 2011
Date Written: October 26, 2011
We examine IPOs in Korea during the period August 2000-January 2002. We conclude that the high level of underpricing in Korean IPOs is the unintended consequence of regulations designed to promote fairness. Two aspects of the regulations distort the process – an “essential price” formula that severely understates the value of the firm; and, bid exclusion rules that give investors a strong incentive to cluster their bids so as to avoid being excluded from the offering. During our sample period the rules were changed somewhat. The result was a change to gaming behavior and somewhat less underpricing.
Keywords: IPO, Underpricing, Book Building, Institutional Investor, Regulatory Changes
JEL Classification: G15, G24, G28
Suggested Citation: Suggested Citation