Abstract

This paper examines why the degree of underpricing of IPOs in Korea is much greater than in the U.S. The analysis shows that both the issuing firm and its underwriter tend to set the IPO price below the mean of the probability distribution of initial market price; the magnitude of IPO underpricing depends positively on the uncertainty of the initial market price and the marginal cost of making aftermarket, and negatively on the size of underwriter’s spread. The structural differences in these factors explain the observed difference in the IPO data of the U.S. and Korea.

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