Empirical studies provide consistent evidence of considerable inefficiency in the pricing of Initial Public Offerings (IPO). In Korea, this underpricing problem has become one of the major problems for private companies that seeks to go public by selling equities since last October because of the liberalization of pricing IPOs.
This paper tests underpricing and short-term performance of IPOs in Korea from 1994 to 1997. In this paper, P/E ratio approach is developed for the pricing of IPOs to get improved pricing. P/E ratio is one of the most reliable ratios to reflect market situation and relative price in the same industry. This model is based on the P/E ratio analysis in the same industry. This empirical result is tested to establish generalizability and robustness of the result.
