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Unintended regulatory consequences: Evidence from the Korean IPOs

Author

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  • Chang, Kiyoung
  • Kim, Yong-Cheol
  • Kim, Young Sang
  • Thornton, John H.

Abstract

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.

Suggested Citation

  • Chang, Kiyoung & Kim, Yong-Cheol & Kim, Young Sang & Thornton, John H., 2012. "Unintended regulatory consequences: Evidence from the Korean IPOs," Pacific-Basin Finance Journal, Elsevier, vol. 20(2), pages 292-309.
  • Handle: RePEc:eee:pacfin:v:20:y:2012:i:2:p:292-309
    DOI: 10.1016/j.pacfin.2011.10.002
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    References listed on IDEAS

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    Keywords

    IPO; Underpricing; Book building; Institutional investor; Regulatory changes;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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