Adverse Information and Allocations: Evidence from the Korean Modified Bookbuilding IPOs

Abstract

The analyses of the comprehensive IPO bookbuilding information of the Korean KOSDAQ market from 2000 to 2002 show that adverse information from institutional investors drives down the offering price, creating close to a 100 percent initial return on average. Policy makers in the Korean IPO market regulate both price updating during bookbuilding process and allocation to institutional and retail investors. The primary findings of this research include: i) Institutional investors, particularly high yield fund investors, provide adverse information primarily in hot issues, ii) More shares are allocated to institutional investors when strong pre-market demands are revealed, iii) Investment bankers decide the offering price far lower than the market clearing price when institutional investors show strong interests, and iv) Underpricing from the market clearing price is severe, however, the aftermarket initial return is not particularly high when more shares are allocated to institutional investors. The overall results support the adverse information view. Institutional investors game the market by taking advantage of regulatory constraints on price update and allocation and underwriters mandatory stabilization on the post IPO markets.