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

Jong-Il Kim and In-Uck Park
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Jong-Il Kim: Dongguk University

Korean Economic Review, 2002, vol. 18, 349-371

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.

Keywords: IPO; underpricing; winner's curse (search for similar items in EconPapers)
JEL-codes: D82 G00 (search for similar items in EconPapers)
Date: 2002
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