Price Limit Relaxation and <scp>IPO</scp> Underpricing in Korea

Abstract On June 26, 2023, Korea widened the allowable range of first‐day returns for initial public offerings (IPOs) from a band of −37% to +160% to a band of −40% to +300% relative to the offer price. This study examines the impact of this regulatory change on IPO underpricing. While traditional finance theory predicts that relaxing price limits enhances price discovery, our empirical analysis finds no statistically significant effect of the reform on IPO underpricing. Although average initial returns increased modestly after the regulatory change, these differences are not statistically significant across various sample periods and model specifications. These findings suggest that the dynamics of IPO underpricing are unlikely to be driven solely by regulatory constraints. Instead, the persistently high levels of underpricing and oversubscription point to the potential importance of institutional features, such as conservative offer pricing and underwriters' reputational incentives, in shaping IPO underpricing.