UNDERPRICING OF IPOS (INITIAL PUBLIC OFFERING) IN BORSA ISTANBUL: THE EFFECT OF COVID-19 PANDEMIC PERIOD

Year 2023, Volume: 18 Issue: 1, 12 - 19, 15.01.2024

Alper Ataker Oktay Tas

https://doi.org/10.17261/Pressacademia.2023.1845

Abstract

Purpose- This research has both theoretical and practical implications. The study's findings will provide valuable insights into the impact of the COVID-19 pandemic on IPO mispricing in the Turkish IPO market. The study delves into the behavior of IPOs that were issued between 2010 and 2022, with a focus on how they were affected by the COVID-19 pandemic. The results may help investors and issuers understand the pandemic's effects on IPO pricing and inform their investment decisions. The study will also provide valuable insights to investors, regulators, and market participants, allowing them to make more informed decisions during market volatility and uncertainty periods.
Methodology- The study involves employing two methods: the traditional ordinary least squares (OLS) and the more appropriate quantile regression (QR). The OLS method focuses on assessing the average impact of independent variables on mispricing, disregarding the unexplored latent characteristics of the mispricing distribution, especially when it deviates from a normal distribution. In contrast, the QR method allows us to investigate the diverse effects of independent variables at different levels of mispricing due to the asymmetric distribution of returns. By employing the QR approach, it can be identified the specific impacts of each variable on IPOs within particular levels of mispricing. This robust method is capable of handling potential heterogeneity in the distribution, which was observed in the sample. The QR method also facilitates the examination of various segments of the mispricing distribution, including the tail regions, enabling a comparison of the effects of explanatory factors on IPOs that range from extremely overpriced to extremely underpriced. Due to the constraints of the project, the paper has been done with a limited number of shares.
Findings- The study investigates the impact of the COVID-19 pandemic on Initial Public Offering (IPO) mispricing in financial markets, examining changes in mispricing levels before, during, and after the pandemic. The results indicate a significant increase in IPO mispricing during the COVID-19 period, consistent with expectations due to factors such as heightened asymmetric information, reduced IPO volume, and decreased demand.
The analysis tests the hypothesis that Covid-19 has a significant impact on IPO results. The results show that the null hypothesis (H0) cannot be rejected, supporting the notion that the pandemic has a substantial effect on IPO mispricing. This is particularly evident in equations examining 1-year returns. Furthermore, the study explores the influence of various factors on IPO mispricing, including stock market indices and dummy variables representing different years. While some index values are found to be insignificant, the Borsa Istanbul-All Index and dummy variables for 2020, 2021, and 2022 are significant in specific equations. Notably, the persistence of the impact of COVID-19 beyond the relevant period suggests a lasting effect on IPO mispricing.
Examining sector-specific effects, the study finds that, based on first-day returns, all sector values, except for SEC 3 (Consumer Non-Cyclicals), are significant. However, for 1-year returns, only SEC 5 (Financials) and SEC 4 (Energy) exhibit significance, with the latter being slightly above the 10% limit. The increasing demand for energy companies in recent times is identified as a potential driver for higher levels of "IPO underpricing" in specific IPOs within these sectors.
Conclusion- The study provides robust evidence of increased IPO mispricing during the COVID-19 pandemic, highlighting the persistent impact of the crisis on financial markets, as well as sector-specific nuances influencing mispricing levels.

Keywords

IPOs (Initial Public Offerings), mispricing, pandemic, initial returns, long-term returns

References

• Ahmad-Zaluki, Nurwati A. and Campbell, Kevin, and Goodacre, Alan. The Long Run Share Price Performance of Malaysian Initial Public Offerings (Ipos) (May 2006).
• Autore, D. M., Boulton, T. J., Smart, S. B. & Zutter, C. J. (2014). The impact of institutional quality on initial public offerings. Journal of Economics and Business, 73(C), 65–96.
• Baig, A. S., Butt, H. A., Haroon, O., & Rizvi, S. A. R. (2021). Deaths, panic, lockdowns, and US equity markets: The case of COVID-19 pandemic. Finance Research Letters, 38, 101701.
• Baig, A. S., Butt, Mengxi, C. (2022). Did the COVID-19 pandemic (really) positively impact the IPO Market? An Analysis of information uncertainty. Finance Research Letters, 46, 102372.
• Beatty, R. P., & Ritter, J. R. (1986). Investment banking, reputation, and the underpricing of initial public offerings. Journal of Financial Economics, 15(1–2), 213–232.
• Bird, R. & Ajmal, H. (2016). Mispricing of Australian IPOs. JASSA: The Finsia Journal of Applied Finance, (1), 27-33.
• Boulton, T. J., Smart, S. B. & Zutter, C. J. (2010). IPO underpricing and international corporate governance. Journal of International Business Studies, 41(2), 206–222.
• Campbell, T. S. & Kracaw, W. A. (1980). Information production, market signaling, and the theory of financial intermediation. The Journal of Finance, 35(4), 863–882.
• Chahine, S. and Filatotchev, I. (2008), The Effects of Information Disclosure and Board Independence on IPO Discount. Journal of Small Business Management, 46, 219-241.
• Chang, H. H., Chen, A., Kao, L. & Wu, C. S. (2014). IPO price discovery efficiency under alternative regulatory constraints: Taiwan, Hong Kong, and the US. International Review of Economics & Finance, 29, 83–96.
• Chao, Y., Jiaxin, W., Zhi, W., Kam, C. C. (2023), Do media connections help? Evidence from IPO pricing in China, Journal of Accounting and Public Policy, 42(3), May-June 2023, 107075.
• Chen, G., Firth, M. & Kim, J.-B. (2004). IPO underpricing in China’s new stock markets. Journal of Multinational Financial Management, 14(3), 283–302.
• Durukan, M. B., (2006), 16 - IPO underpricing and ownership structure: Evidence from the Istanbul Stock Exchange, Editor(s): Greg N. Gregoriou, In Quantitative Finance, Initial Public Offerings, Butterworth-Heinemann.
• Engelen, P. J. & van Essen, M. (2010). Underpricing of IPOs: Firm-, issue- and country-specific characteristics. Journal of Banking & Finance, 34(8), 1958–1969.
• Esterling, E. (2022, January). Volatility in Perspective. Crestmont Research. https://www.crestmontresearch.com/docs/Stock-Volatility-Perspective.pdf [Date Accessed: August 4, 2023].
• Gao, Y. (2010). What comprises IPO initial returns: Evidence from the Chinese market. Pacific-Basin Finance Journal, 18(1), 77–89.
• Green, T.C., Jame, R. (2013), Company name fluency, investor recognition, and firm value. Journal of Financial Economics, 109 (2013), 813-834.
• Grinblatt, M., & Hwang, C. Y. (1989). Signaling and the pricing of new issues. The Journal of Finance, 44(2), 393–420.
• Guo, H. & Brooks, R. (2008). Underpricing of Chinese A-share IPOs and short-run underperformance under the approval system from 2001 to 2005. International Review of Financial Analysis, 17(5), 984–997.
• Habib, M. A. & Ljungqvist, A. P. (2001). Underpricing and entrepreneurial wealth losses in IPOs: Theory and evidence. Review of Financial Studies, 14(2), 433–458.
• Hamao, Y., Packer, F. & Ritter, J. R. (2000). Institutional affiliation and the role of venture capital: Evidence from initial public offerings in Japan. Pacific-Basin Finance Journal, 8(5), 529–558.
• Hill, P. & Wilson, N. (2006). Value gains on flotation and IPO underpricing. Journal of Business Finance & Accounting, 33(9-10), 1435–1459.
• Hopp, C. & Dreher, A. (2013). Do differences in institutional and legal environments explain cross-country variations in IPO underpricing? Applied Economics, 45(4), 435–454.
• Husnan, S., Hanafi, M. M. & Munandar, M. (2014). Price stabilization and IPO underpricing: An empirical study in the Indonesian stock exchange. Journal of Indonesian Economy and Business, 29(2), 129-142.
• Ibbotson, Roger G., (1975). Price performance of common stock new issues. Journal of Financial Economics. 2(3), 235–272.
• Ilbasmış, M. (2023), Underpricing and aftermarket performance of IPOs during the Covid-19 period: Evidence from Istanbul stock exchange, Borsa Istanbul Review, 23(3), 662-673.
• Jamaani, F. & Abdullahi Dahir A. (2021). Modifier effects of country-level transparency on global underpricing difference: new hierarchical evidence. International Review of Financial Analysis, 74(C), 1016-1067.
• Jelic, R., Saadouni, B. & Briston, R. (2001). Performance of Malaysian IPOs: Underwriters reputation and management earnings forecasts. Pacific-Basin Finance Journal, 9(5), 457–486.
• Kiymaz, H., (2000). The initial and aftermarket performance of IPOs in an emerging market: evidence from Istanbul stock exchange. Journal of Multinational Financial Management, 10(2), 213-227.
• Kooli, M. & Suret, J. M. (2001). The underpricing of initial public offerings: Further Canadian Evidence. CIRANO Working Paper No. 2001-50.
• Kucukkocaoglu, G., (2008), Underpricing in Turkiye: A Comparison of the IPO Methods, Money Macro and Finance (MMF) Research Group Conference 2006 8, Money Macro and Finance Research Group.
• Lee, J. S. & Kuo, C. T. (2010). Determinants of high and low IPO initial returns: Evidence from Taiwan’s stock markets. Journal of Information and Optimization Sciences, 31(6), 1189–1207.
• Lee, P. J., Taylor, S. L. & Walter, T. S. (1996). Australian IPO pricing in the short and long run. Journal of Banking & Finance, 20(7), 1189–1210.
• Lin, H. L., Pukthuanthong, K. & Walker, T. J. (2013). An international look at the lawsuit avoidance hypothesis of IPO underpricing. Journal of Corporate Finance, 19, 56–77.
• Ljungqvist, A. P. (1997). Pricing initial public offerings: Further evidence from Germany. European Economic Review, 41(7), 1309–1320.
• Logue, D. E. (1973). On the Pricing of Unseasoned Equity Issues: 1965-1969. The Journal of Financial and Quantitative Analysis, 8(1), 91–103.
• Loughran, T. & Ritter, J. R. (2002). Why don’t issuers get upset about leaving money on the table in IPOs? Review of Financial Studies, 15(2), 413–444.
• McGuinness, P. (1992). An examination of the underpricing of initial public offerings in Hong Kong: 1980-90. Journal of Business Finance & Accounting, 19(2), 165–186.
• Michaely, R. & Shaw, W. H. (1994). The pricing of initial public offerings: Tests of adverse-selection and signaling theories. Review of Financial Studies, 7(2), 279–319.
• Miller, R. E. & Reilly, F. K. (1987). An examination of mispricing, returns, and uncertainty for initial public offerings. Financial Management, 16(2), 33–38.
• Montone, M., van den Assem, M.J., Zwinkels, R.C.J. (2023), Company name fluency and stock returns. Journal of Behavioral and Experimental Finance, 39, 100819, September 2023.
• Naoshi, I. (2022). Optimism, divergence of investors’ opinions, and the long-run underperformance of IPOs, Journal of Financial Markets, 64, 2023.
• Orhan, M., (2006), 4 - Short- and long-run performance of IPOs traded on the Istanbul Stock Exchange, Editor(s): Greg N. Gregoriou, In Quantitative Finance, Initial Public Offerings, Butterworth-Heinemann, 2006.
• Ritter, J. R. (1984). The “Hot Issue” Market of 1980. The Journal of Business, 57(2), 215–240.
• Rock, K., (1986). Why new issues are underpriced. Journal of Financial Economics, 15(1–2), 187–212.
• Wang, C. (2005). Ownership and operating performance of Chinese IPOs. Journal of Banking & Finance, 29(7), 1835–1856.
• Wang, S., Wang, P., Cebula, R.J., Foley, M. (2023), Board characteristics and IPO underpricing in China: The perspective of the moderating effect of venture capitalists, Finance Research Letters, 52, 103491.
• Welch, I., (1996). Equity offerings following the IPO theory and evidence. Journal of Corporate Finance, 2(3), 227-259.
• Wu, S. (2023), Impact of serial entrepreneurs on IPO valuation: Evidence from U.S. IPOs, The North American Journal of Economics and Finance, 64, 101857.
• Zaremba, A., Kizys, R., Aharon, D. Y., & Demir, E. (2020). Infected Markets: Novel Coronavirus, Government Interventions, and Stock Return Volatility around the Globe. Finance Research Letters, 35, 101597.