Does Income Equality of Export IPO Firms Hurt Their Market Returns in Korea?: Using Fama-French 5 Factor Model

Abstract

Purpose - This study investigates the effects of income inequality across provinces of export firms on their initial and long-term stock returns in the Korean initial public offering (IPO) market. Design/Methodology/Approach - Using 520 IPO firms listed on the Korea Exchange (KRX) from 2002 to 2016 and financial and accounting, regional population data and IPO information, we study the effects of income inequality, measured in relative Gini coefficients over provinces of Korea, of export firms on initial returns (IR) and their long-term cumulative abnormal returns (CARs). Findings - The Gini income inequality index is found to have a positively significant effect on the IR of IPO for the whole and the export firm sample, but without statistical significance for the non-export firm sample. Second, the level of exports has a negative and significant effect on the initial returns of IPO for the pooled sample. Third, the income inequality not only affects IR, but also affects the long-term CARs. Fourth, the export ratio does not show any statistically significant effect on the long-term CARs for all the samples in the CAPM model. Fifth, the income inequality index also has a significant positive effect on all the three measures of CARs in the Fama-French 3, 4 and 5 factor models. Research Implications - We propose to allocate IPO shares based on income level, hopefully more shares to be assigned to lower income investors.