The pricing of underwriting services in the Korean IPO market: Characteristics and determinants

Abstract

This paper analyzes underwriting fees in the Korean IPO market, utilizing IPOs issued from January of 2000 to June of 2006. The study focuses on two main questions: are there any discernable clustering patterns in underwriting fees in Korea and what factors affect these fees? In the overall sample, we do not identify any clear clustering patterns. However, when examined separately, two separate clustering ranges for small and large IPOs can be established. For small IPOs, underwriting fees expressed as the absolute amount of the fee are clustered between 250 and 350 million KRW. For large IPOs, the underwriting fees are clustered around 3-4% of the offering. We believe this is due to fee setting practices in Korea. We scrutinize the economies of scale in underwriting fees in Korea. IPO offer size is the crucial determinant of. underwriting fees for both small and large IPOs. Underwriters tend to charge lower fees during a hot issue market period. For large IPOs, after the introduction of put-back options underwriters began to charge lower fees. Additionally, more profitable issuing firms pay lower underwriting fees. Corporate governance is another important determinant of underwriting fees, especially for small IPOs. In small IPOs, we demonstrate positive correspondence between the length of subscription period and the underwriting fee.