Effects of Institutional Investors’ Bidding Information on Offer Prices and Initial Returns of IPOs

Abstract

Using hand‐collected data on all IPOs in Korea from 2001 to 2007 before the global financial crisis, we find that institutional investors’ favorable valuation increases the offer price and initial returns. In particular, when institutional investors’ weighted average bidding price (WAP) increases by 1%, the offer price increases by 0.81%. A higher WAP predicts higher initial returns. While oversubscription ratios yield positive effects on offer prices and predict higher initial returns, their effects are weaker when IPO market conditions or WAP are included in the regression equations. These results suggest that institutional investors’ bidding prices reflect their private valuations of firms more than their oversubscription ratios. In addition, for predicting initial returns, institutional investors’ bidding information outperforms the revised offer price.

The Board Structure and Performance in IPO Firms: Evidence from Stakeholder-Oriented Corporate Governance

“…We measure underpricing with both the market-adjusted return and the raw return. Table 1 shows that the average of underpricing is about 66.2%, which is higher than the average underpricing for IPOs during 2001-2007 [67]. The mean of board independence is about 10%, which is almost the same as in the listed companies [19].…”

Advances in the corporate finance literature: a survey of recent studies on Korea

“…Specifically, the underpricing is significantly higher when firms intend to use IPOs as a last resort for raising funds than when exiting equity holders want to diversify their holdings. Joh and Kim (2017) show that institutional investors' higher bidding prices predict lower IPO underpricing. In contrast, institutional investors' oversubscription ratios are not 9 Advances in the corporate finance literature significantly related to initial returns.…”

“…Studies on the equity issuance in Korean markets examine the underpricing of initial public offerings (IPOs) (Kim et al, 1993;Joh and Kim, 2017), the long-run stock performance of equity offering firms (Kim et al, 1995a (IPOs); Mathew, 2002 (seasoned equity offerings or SEOs)), the role of the information in prospectuses in the pricing of IPOs (Kim et al, 1995b), earnings management prior to equity issuance (Yoon and Miller, 2002), motives for equity offerings and the types of shares offered (Kim and Weisbach, 2008), and the private placement of equity-linked securities and tunneling (Baek et al, 2006).…”