The Effects of Related Party Transactions of Export IPO Firms on Their Stock Returns in Korea

Purpose This study investigates the effects of exports on investors’ responses in the initial public offering (IPO) market and secondary market in Korea based on related-party transactions (RPTs) among affiliated firms. Design/Methodology/Approach This study employs a merged data set of value and total service data from the 2000 database of the Korea Information Service. The data include 567 IPO firms that went public on Korea Exchange between 2002 and 2016. Their cross-sectional and time-series data are included;namely;accounting;financial market;and corporate profile data. We calculated market-adjusted cumulative abnormal returns for 5 years after the IPOs;in addition to IPO initial returns. We apply the Huber White-Sandwich robust multivariate linear regression models to test our hypotheses on the severity of information asymmetry. Findings First;the exports of Korean IPO firms negatively influence IPO initial returns;though not extremely statistically significant;whereas the aggregate value of RPTs in goods positively influences initial returns. Second;aggregate RPTs in goods positively influence export and non-export firms’ initial returns and thus for all firms pooled together. However;aggregate RPTs in funds negatively influence non-export firms only. Third;the positive effects on initial returns are statistically significant in export firms’ sales;revenues;and RPT costs and statistically significant and negative in non-export firms’ sales in RPTs. Fourth;export firms’ IPO initial returns are short-term;whereas firms with RPTs have better long-term performance in most RPTs;except for loans made to their affiliated firms in the group. Fifth;the positive effects of high initial returns on long-term abnormal returns after IPOs reject the well-known phenomena of the winner’s curse in other countries’ IPOs. This result is particular for export firms in Korea;despite their RPTs. Research Implications We find that Korean IPO firms suffer from severe underpricing due to information asymmetry on RPTs in goods between affiliated firms;especially for export firms. RPTs of export firms in business groups may aggravate the underpricing problem in setting the IPO offer price. This condition may also result in poor long-term returns for outside investors due to intrinsic disbelief in RPTs in financial markets.