Effects of Investment Competition Rate by Investor Type on Short- and Long-term Stock Returns in the Korean IPO Market

Abstract

This study empirically investigates whether the investment competition rate by investor type (institutional demand prediction competition rate, general public offering competition rate, and employee stock subscription rate) in the Korean IPO market is informative in predicting future stock prices after IPO. The results of analyzing the IPO sample from 2001 to 2021 are as follows. First, we find that firms with a high competition rate for institutional demand forecasting have more efficient public offering prices and an increased external monitoring effect, reducing long-term underperformance anomalies. Second, we find that firms with high public offering subscription rates show increased short-term overreaction behavior after an IPO and increased underperformance anomalies in the long term. Third, we find that firms with a high employee stock subscription rate partially reduce long-term underperformance for two years after their IPO. Overall, this study’s results empirically show that non-financial information (investment competition rate) available in the IPO market is useful for evaluating the quality of IPO firms and predicting future performance.