Effect of IPO Underpricing on Seasoned Offerings

Abstract

1) According to IPO signaling theory, IPO underpricing is used under information asymme-try, where an issuing firm has better information on firm quality to signal the firm’s true value. This signaling is costly, but may enable the firm to return to the market and sell se-curities on better terms at a later date. The empirical implications of IPO signaling theory is that underpricing has a favorable and significant effect on the probability, size, and speed of subsequent security offerings. This study examines IPO signaling theory using an IPO sample in the KOSDAQ market. We consider the upper or lower price limit in Korea and define underpricing as the first-day return as well as the 10-day and 20-day return after IPOs. We examine the IPO samples in the KOSDAQ market to find that, consistent with the signaling theory, underpricing significantly increases the probability of seasoned securities. This result holds when we estimate the instrumental variable probit model and control for endogeneity. However, we find that the size and period taken for seasoned offerings are not significantly correlated with underpricing. The contribution of this study to the IPO literature is that it is the first study to investigate IPO signaling theory in the Korean market. Furthermore, the finding that underpricing is statistically correlated with the probability of seasoned securities offerings but not statistically correlated with the size and time of such offerings has important academic and practical implications.