Special Issue on External Financing in Private and Public Markets in the Asia‐Pacific Region

This special issue of the Asia-Pacific Journal of Financial Studies contains several papers focusing on equity and debt issuance. Institutional practice and regulations vary across countries, and these regulations change. Regulators, who try to balance facilitating capital formation with investor protection, can learn from changes made elsewhere. Thus, although each paper in this special issue focuses on just one market, the findings have broader applicability. Although bonds also have initial public offerings (IPOs), both the media and academics have focused on equity IPOs, largely because of the extreme underpricing that frequently occurs. In many countries, including China, Indonesia, Korea, and Turkey, there are or were limits on the maximum allowable price change on the first day of trading of an IPO. In China, for example, during 2014–2019 almost all of the IPOs jumped by the maximum allowable increase of 44% on their first day of trading. This price limit has since been relaxed or eliminated. In Korea, the price limits have not been as binding. The first paper in this issue examines the effect of the June 2023 change in allowable first-day returns, when the maximum permitted price jump from the offer price increased from 160% to 300%. In Korea, as in China, orders for shares at the offer price frequently exceed the supply of shares offered by a factor of 1000. The paper finds, however, that the relaxation of the first-day price limit did not have a large effect on investor strategies. A second paper in this special issue examines the influence of cornerstone investors, a common practice in Hong Kong IPOs. Everywhere, information asymmetries are an important feature of IPOs. A cornerstone investor buys a pre-arranged large stake at the offer price and is locked up, providing certification to other investors and potentially allowing an issuer to set a higher offer price. In this regard, a PIPE (private investment in public equity) investor at the time of a merger between a special purpose acquisition company (SPAC) and an operating company serves a similar function. In recent years, SPACs have been common in the U.S. and Korea, showing how evidence from one market (Hong Kong) can provide useful insights in other markets. The third paper in this special issue focuses on the pricing of bond offers in the U.S., where issuers have a choice of private placements versus public offerings. As with equity IPOs, asymmetric information comes into play, but the speed of issuing also matters. The paper documents that a 2005 regulatory change largely eliminated the speed of issuance consideration. The market share of public issuance declined following this regulatory change, but issuers for which information asymmetries are important still have strong motives to issue privately using Rule 144A. Both the Hong Kong IPO paper and the U.S. bond issue paper demonstrate how large investors can be used to reduce problems created by information asymmetries.