The Role of Financial Variables in the Pricing of Korean Initial Public Offerings

Using a sample of 260 initial public offerings (IPOs) listed on the Korea Stock Exchange during the January 1985 – March 1990 period, this paper investigates the role of information disclosed through the prospectus in the new issues market. The evidence indicates that the market price is significantly affected by financial variables, such as earnings per share, offer size, industry-wide prospects, and offer type. The inclusion of potential signalling variables does not increase the explanatory power and predictive ability of the model. We also find that the market price is more closely associated with these financial variables after the 1988 liberalization of Korean IPO pricing than it was before. This study, therefore, highlights the importance of financial variables contained in the offering prospectus for the pricing of IPOs in the new issues market where information is scarce