Latest Publictions
2010 Dec/15
The Analysis of Competition in the Korean IPO market
Research Papers 10-05
PDF
- Research Topic Financial Services Industry Capital Markets
- Page 114
Park, Shin Ae
- Summary
- There has been no discrepancy in the opinions that Financial Investment Services and Capital Market Act (FISCMA), becoming effective on February 4, 2009, should contribute to facilitating advanced investment banking services from the Korean domestic financial investment companies (hereafter, KDFICs). But, since their revenues are taken mostly from brokerage business, the KDFICs` goal developing as IB oriented institutions in the domestic market seems to be far off. It is because IB market size as well as the regulatory support is absolutely an important factor in order to turn to KDFICs with sizable IB revenue, while current Korean IB market is still in an early stage relative to American or European IB markets. As a result, it is an important task to attract corporate clients and thus expand IB market by improving on the KDFICs` competitiveness on the IB service. From this point of view, this report will consider KDFICs` competition and competitiveness with focusing on IPO business, the core and touchstone of the investment banking, and then will suggest its several directions and improvements. The report documents changes in the regulation and features in the domestic IPO market, such as volumes, individual issue size, IPO spreads and industries issuers belong to, based on the data from 2001 to 2009. The yearly IPO volume was relatively small early-2000s following IT bubble periods but had increasing trends after mid-2000s. The individual IPO size jumped up in the late 2000s, with the stricter capital requirement of KOSDAQ IPOs in the mid-2000s. Many of small-medium size IPO spreads ranged from 3 to 6% and had a negative relationship with their issue amounts. In contrast, most large size IPOs had 1 to 2% spreads, showing no relationship with their sizes. Over the sample periods, IPO firms in the KOSPI market belonged mostly to the IT, financial and mature industries while many KOSDAQ IPO firms appeared in the IT, medical and new growth industries. Domestic IPO regulation in the 2000s was much developed in the bookbuilding methods, associated with the IPO offering price and allocation process. More importantly, obligatory market stabilization and putback option regulation that aimed to support IPO stocks` aftermarket prices were relaxed step by step, with blaming for too much underpriced offering prices derived under those regulations. The report showed that individual IPO sizes as well as total IPO volumes had a strong effect on the market concentration index. In other words, the market concentration increased as total IPO market size decreased, but it varied with individual IPO size. In fact, It is in the late 2000s when individual IPO size jumped up that some of small size KDFICs exited with the market concentration increasing. In the mean time, the IPO spreads decreased despite of the higher market concentration. IPO spreads decreased the most for the group of medium size KDFICs and the next was the large size KDFICs group. It showed that large and medium size KDFICs competed more severely in late 2000s. We also discussed the competition in the domestic IPO market based on a hypothesis suggesting the relationship between KDFICs` competitiveness and their competition. The hypothesis is as follows; large size KDFICs offered much more competitive IPO services than medium size KDFICs, then large size KDFICs had higher market power in the late 2000s when the portion of large IPOs increased. Otherwise, medium size KDFICs might trigger competition with lower IPO spreads in order to win large IPOs. We found that the number of medium size KDFICs winning a large IPO increased and both large and medium size KDFICs` IPO spreads, on average, dropped much more compared to small size KDFICs` in the late 2000s. We concluded that it was consistent with the hypothesis that large and medium size KDFICs were not much different in the IPO service competitiveness. The report showed that KDFIC`s reputation index that builds on their market shares was not related to two IPO competitiveness indications, offering price revision and underpricing. This result also reconfirmed the hypothesis that large size KDFICs were not more competitive in the IPO services. We also found lower underpricing and higher IPO spreads in the American and European markets, in which many global investment banks competed. This implies that KDFICs should build on a good reputation on the IPO service in order to increase IPO spreads. We provide several comments on the prerequisites to improve on the KDFICs` IPO services as follows; Firstly, KDFICs should concentrate on a competition strategy picking up and underwriting the high quality issuers rather than increasing their market shares simply. Secondly, KDFICs should strengthen their role of finding an appropriate offering price through more strict due-diligence, active IPO marketing or IR, communication with institutional investors. To the extent they find a more appropriate offering price, KDFICs can provide a certification role through IPO price stabilization activities. Based on the activities of underwriting high quality issuers, finding appropriate offering prices, and certificating IPO stocks, KDFICs` reputation establishment should make investors to have credit on the IPO investment, lower a premium on IPO uncertainty and thus a cost of raising capital. As a result, it would vitalize IPO markets and lead more firm clients to the capital market. Finally, KDFICs should relax price competition in the IPO market by bundling more active corporate financing services after IPO, for instance, analyst coverage, IR, corporate financing consulting.