ABSTRACT
The underpricing signal hypothesis for initial public offerings (IPOs), as documented by Slovin et al (1994), suggests that greater IPO underpricing creates a favorable market response to subsequent equity offerings. Employing a sample of 224 Korean firms going public with an initial public offering (IPO) along with their first seasoned equity offering (SEO), this study attempts to determine if the underpricing signal hypothesis holds in Korean markets. Contrary to findings in the U.S. markets, the results of this study reveal that there is no association between the magnitude of IPO underpricing and investor reactions to subsequent SEOs. Additionally, the market reaction to SEOs was significantly positive, which is in contradiction to the commonly observed share dilution effect in the U.S. A key finding of this study is that the small firm effect, where smaller firms generate greater abnormal returns, is more evident in the SEO offering than in the IPO issue, perhaps due to the mitigation of some information asymmetry after the firm has gone public with its IPO issue.
Keywords
IPO, SEO, Korea, Underpricing, Signaling