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Stock Market Condition and Pricing of Initial Public Offerings: A Theory and Evidence From the KOSDAQ Stock Market

Author

Listed:
  • Jong-Il Kim

    (Dongguk University)

  • In-Uck Park

    (University of Pittsburgh)

Abstract

In this paper we incorporate downward sloping demand curve into the well-known winner's curse model of Rock (1986) that explains the underpricing in IPOs, and examine the additional implications that this has in the pricing of the IPO. Specifically, we derive theoretical implications on how the degree of underpricing changes both in the size of IPOs and in the size of active investors. Our theory predicts the same relationships as the basic winner's curse theory of Rock in the "cold issue" markets. Unlike Rock's theory, however, our model shows that these relationships may change in the "hot issue" markets. This possibility of systematic dependence of the relationships on the market condition as indicated in our theory, is shown to be empirically supported by the IPo data in the KOSDAQ stock market.

Suggested Citation

  • Jong-Il Kim & In-Uck Park, 2002. "Stock Market Condition and Pricing of Initial Public Offerings: A Theory and Evidence From the KOSDAQ Stock Market," Korean Economic Review, Korean Economic Association, vol. 18, pages 349-371.
    • Handle: RePEc:kea:keappr:ker-200212-18-2-09
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    Cited by:

    1. Alan Hughes & Jaeho Lee, 2006. "What's in a name and when does it matter? The hot and cold market impacts on underpricing of certification, reputation and conflicts of interest in venture capital backed Korean IPOs," Working Papers wp336, Centre for Business Research, University of Cambridge.

    More about this item

    Keywords

    IPO; underpricing; winner's curse;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G00 - Financial Economics - - General - - - General

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