Valuation and underpricing of Turkish IPOs
Abstract
This study utilizes prospectuses and supplementary valuation reports to investigate the relationship between underwriters’ valuation and underpricing in 113 firms going public on Borsa Istanbul. It argues that underwriter discretion in the valuation is crucial to underpricing in the Turkish market, where fixed price is the dominant method of offering and retail investor allocation is large. Building on the overpricing theories, the study hypothesizes and finds that optimistic valuation bias is a significant determinant of underwriter discounts, and underwriter discounts are negatively associated with initial returns. One standard deviation increase in deliberate discounts is associated with a 30.4% reduction in underpricing. The median underwriter discount in the sample is 21%, while the median market-adjusted initial return is a small 1.45%, indicating that discounts might not be designed to induce underpricing and reward investors. Book-built offerings are overvalued and overdiscounted; however, not underpriced, contrasting the information extraction view.
Keyword : initial public offering (IPO), valuation, underpricing, underwriter discount, bookbuilding, fixed price, Turkey
How to Cite
Tutuncu, L. . (2020). Valuation and underpricing of Turkish IPOs. Journal of Business Economics and Management, 21(1), 157-179. https://doi.org/10.3846/jbem.2020.11927
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Alford, A. (1992). The effect of the set of comparable firms on the accuracy of the price-earnings valuation method. Journal of Accounting Research, 30(1), 94–108. https://doi.org/10.2307/2491093
Allen, F., & Faulhaber, G. R. (1989). Signaling by underpricing in the IPO market. Journal of Financial Economics, 23(2), 303–324. https://doi.org/10.1016/0304-405X(89)90060-3
Baker, M., & Wurgler, J. (2000). The equity share in new issues and aggregate stock returns. Journal of Finance, 55(5), 2219–2257. https://doi.org/10.1111/0022-1082.00285
Benveniste, L. M., & Busaba, W. M. (1997). Bookbuilding vs. fixed price: An analysis of competing strategies for marketing IPOs. Journal of Financial and Quantitative Analysis, 32(4), 383–403. https://doi.org/10.2307/2331230
Benveniste, L. M., & Spindt, P. A. (1989). How investment bankers determine price and allocation of initial public offerings. Journal of Financial Economics, 24(2), 343–361. https://doi.org/10.1016/0304-405X(89)90051-2
Bildik, R., & Yilmaz, M. K. (2008). The market performance of initial public offerings in the Istanbul Stock Exchange. Journal of BRSA Banking and Financial Markets, 2(2), 49–76.
Bonaventura, M., & Giudici, G. (2017). IPO valuation and profitability expectations: Evidence from the Italian exchange. Eurasian Business Review, 7(2), 247–266. https://doi.org/10.1007/s40821-016-0049-1
Bonaventura, M., Giudici, G., & Vismara, S. (2018). Valuation and performance of reallocated IPO shares. Journal of Financial Markets, Institutions and Money, 54, 15–26. https://doi.org/10.1016/j.intfin.2017.05.005
Bradley, D. J., Jordan, B. D., & Ritter, J. R. (2003). The quiet period goes out with a bang. Journal of Finance, 58(1), 1–36. https://doi.org/10.1111/1540-6261.00517
Chahine, S. (2004). Long-run abnormal returns after IPOs and optimistic analysts’ forecasts. International Review of Financial Analysis, 13(1), 83–103. https://doi.org/10.1016/j.irfa.2004.01.004
Chen, Y., Goyal, A., Veeraraghavan, M., & Zolotoy, L. (2019). Media coverage and IPO pricing around the world. Journal of Financial and Quantitative Analysis (In press). https://doi.org/10.1017/S0022109019000486
Chowdhry, B., & Sherman, A. (1996a). The winner’s curse and international methods of allocating initial public offerings. Pacific-Basin Finance Journal, 4(1), 15–30. https://doi.org/10.1016/0927-538X(96)00004-2
Chowdhry, B., & Sherman, A. (1996b). International differences in oversubscription and underpricing of IPOs. Journal of Corporate Finance, 2(4), 359–381. https://doi.org/10.1016/0929-1199(96)00002-8
Clarke, J., Khurshed, A., Pande, A., & Singh, A. K. (2016). Sentiment traders and initial returns: The Indian evidence. Journal of Corporate Finance, 37, 24–37. https://doi.org/10.1016/j.jcorpfin.2015.10.007
Colaco, H. M. J., De Cesari, A., & Hegde, S. P. (2017). Retail investor attention and IPO valuation. European Financial Management, 23(4), 691–727. https://doi.org/10.1111/eufm.12113
Deloof, M., Maeseneire, W. D., & Inghelbrecht, K. (2009). How do investment banks value initial public offerings (IPOs)? Journal of Business Finance & Accounting, 36(1–2), 130–160. https://doi.org/10.1111/j.1468-5957.2008.02117.x
Derrien, F. (2005). IPO pricing in “hot” market conditions: who leaves money on the table? Journal of Finance, 60(1), 487–521. https://doi.org/10.1111/j.1540-6261.2005.00736.x
Derrien, F., & Womack, K. L. (2003). Auctions versus bookbuilding and the control of underpricing in hot IPO markets. Review of Financial Studies, 16(1), 31–61. https://doi.org/10.1093/rfs/16.1.0031
Durukan, M. B. (2002). The relationship between IPO returns and factors influencing IPO performance: case of the Istanbul Stock Exchange. Managerial Finance, 28(2), 18–38. https://doi.org/10.1108/03074350210767672
Firth, M., Li, Y., & Wang, S. S. (2008). Valuing IPOs using price-earnings multiples disclosed by IPO firms in an emerging capital market. Review of Pacific Basin Financial Markets and Policies, 11(3), 429–463. https://doi.org/10.1142/S0219091508001428
Francis, J., Olsson, P., & Oswald, D. R. (2000). Comparing the accuracy and explainability of dividend, free cash flow and abnormal earnings equity value estimates. Journal of Accounting Research, 38(1), 45–70. https://doi.org/10.2307/2672922
Gajewski, J. F., & Gresse, C. (2006). A survey of the European IPO market (ECMI Paper).
Haggard, K. S., & Xi, Y. (2017). IPO overvaluation and returns prior to lockup expiration. Managerial Finance, 43(12), 1392–1410. https://doi.org/10.1108/MF-05-2017-0172
How, J., Lam, J., & Yeo, J. (2007). The use of comparable firm approach in valuing Australian IPOs. International Review of Financial Analysis, 16(2), 99–115. https://doi.org/10.1016/j.irfa.2006.09.003
Hsu, Y., Hung, C., & Shiu, C. (2009). Why have IPO auctions lost market share to fixed-price offers? Evidence from Taiwan. Journal of Financial Studies, 17(1), 1–36. https://doi.org/10.6545/JFS.2009.17(3).1
Huang, H., Chiang, M., Lin, J., & Lin, Y. (2017). Fixed-price, auction, and bookbuilding IPOs: Empirical evidence in Taiwan. Finance Research Letters, 22, 11–19. https://doi.org/10.1016/j.frl.2017.04.002
Hundtofte, C. S., & Torstila, S. (2018). Evidence on anchoring to industry multiples in IPO pricing (Working paper). https://doi.org/10.2139/ssrn.2690869
Jenkinson, T., & Jones, H. (2004). Bids and allocations in European IPO bookbuilding. Journal of Finance, 59(5), 2309–2338. https://doi.org/10.1111/j.1540-6261.2004.00700.x
Kim, M., & Ritter, J. R. (1999). Valuing IPOs. Journal of Financial Economics, 53(3), 409–437. https://doi.org/10.1016/S0304-405X(99)00027-6
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. https://doi.org/10.1016/S1042-444X(99)00027-4
Ljungqvist, A., Nanda, V., & Singh, R. (2006). Hot markets, investor sentiment, and IPO pricing. Journal of Business, 79(4), 1667–1702. https://doi.org/10.1086/503644
Lopez, A. R., & Martin, G. R. (2019). The marketability discount in Spanish valuation multiples: Investors’ perception in listed companies versus private transactions. Journal of Business Economics and Management, 20(1), 107–130. https://doi.org/10.3846/jbem.2019.8101
Loughran, T., Ritter, J. R., & Rydqvist, K. (1994). Initial public offerings: international insights. PacificBasin Finance Journal, 2(2–3), 165–199. https://doi.org/10.1016/0927-538X(94)90016-7
Low, S., & Yong, O. (2011). Explaining over-subscription in fixed-price IPOs: Evidence from the Malaysian stock market. Emerging Markets Review, 12(3), 205–216. https://doi.org/10.1016/j.ememar.2011.03.003
Paleari, S., & Vismara, S. (2007). Over-optimism when pricing IPOs. Managerial Finance, 33(6), 352– 367. https://doi.org/10.1108/03074350710748722
Paleari, S., Signori, A., & Vismara, S. (2014). How do underwriters select peers when valuing IPOs? Financial Management, 43(4), 731–755. https://doi.org/10.1111/fima.12060
Pandey, A. (2004). Initial returns, long run performance and characteristics of issuers: Differences in Indian IPOs following fixed price and book building processes (Working Paper). Indian Institute of Management, Ahmedabad.
Purnanandam, A. K., & Swaminathan, B. (2004). Are IPOs really underpriced? Review of Financial Studies, 17(3), 811–848. https://doi.org/10.1093/rfs/hhg055
Ritter, J. R. (2003). Differences between European and American IPO markets. European Financial Management, 9(4), 421–434. https://doi.org/10.1111/1468-036X.00230
Ritter, J. R., & Welch, I. (2002). A review of IPO activity, pricing and allocations. Journal of Finance, 57(4), 1795–1828. https://doi.org/10.1111/1540-6261.00478
Rock, K. (1986). Why new issues are underpriced. Journal of Financial Economics, 15(1–2), 187–212. https://doi.org/10.1016/0304-405X(86)90054-1
Roosenboom, P. (2007). How do underwriters value IPOs? An empirical analysis of the French IPO market. Contemporary Accounting Research, 24(4), 1217–1243. https://doi.org/10.1506/car.24.4.7
Roosenboom, P. (2012). Valuing and pricing of IPOs. Journal of Banking and Finance, 36(6), 1653–1664. https://doi.org/10.1016/j.jbankfin.2012.01.009
Sherman, A. (2005). Global trends in IPO methods: Bookbuilding versus auctions with endogenous entry. Journal of Financial Economics, 78(3), 615–649. https://doi.org/10.1016/j.jfineco.2004.09.005
Shiller, R. J. (1990). Speculative prices and popular models. Journal of Economic Perspectives, 4(2), 55–65. https://doi.org/10.1257/jep.4.2.55
SPK. (2013a). Directive 128.VII.1 of the Capital Markets Board of 22 June 2013 on the Equity Issue. http://www.resmigazete.gov.tr/eskiler/2013/06/20130622-8.htm
SPK. (2013b). Bulletin 2013/5 of the Capital Markets Board of 12 February 2013 on the Equity Issue. http://spk.gov.tr/Bulten/Goster?year=2013&no=5
Tinic, S. M. (1988). Anatomy of initial public offerings of common stock. Journal of Finance, 43(4), 789–822. https://doi.org/10.1111/j.1540-6261.1988.tb02606.x
Vismara, S., Signori, A., & Paleari, S. (2015). Changes in underwriters’ selection of comparable firms pre- and post-IPO: Same bank, same company, different peers. Journal of Corporate Finance, 34, 235–250. https://doi.org/10.1016/j.jcorpfin.2015.07.010
Welch, I. (1992). Sequential sales, learning, and cascades. Journal of Finance, 47(2), 695–732. https://doi.org/10.2307/2329120
Alford, A. (1992). The effect of the set of comparable firms on the accuracy of the price-earnings valuation method. Journal of Accounting Research, 30(1), 94–108. https://doi.org/10.2307/2491093
Allen, F., & Faulhaber, G. R. (1989). Signaling by underpricing in the IPO market. Journal of Financial Economics, 23(2), 303–324. https://doi.org/10.1016/0304-405X(89)90060-3
Baker, M., & Wurgler, J. (2000). The equity share in new issues and aggregate stock returns. Journal of Finance, 55(5), 2219–2257. https://doi.org/10.1111/0022-1082.00285
Benveniste, L. M., & Busaba, W. M. (1997). Bookbuilding vs. fixed price: An analysis of competing strategies for marketing IPOs. Journal of Financial and Quantitative Analysis, 32(4), 383–403. https://doi.org/10.2307/2331230
Benveniste, L. M., & Spindt, P. A. (1989). How investment bankers determine price and allocation of initial public offerings. Journal of Financial Economics, 24(2), 343–361. https://doi.org/10.1016/0304-405X(89)90051-2
Bildik, R., & Yilmaz, M. K. (2008). The market performance of initial public offerings in the Istanbul Stock Exchange. Journal of BRSA Banking and Financial Markets, 2(2), 49–76.
Bonaventura, M., & Giudici, G. (2017). IPO valuation and profitability expectations: Evidence from the Italian exchange. Eurasian Business Review, 7(2), 247–266. https://doi.org/10.1007/s40821-016-0049-1
Bonaventura, M., Giudici, G., & Vismara, S. (2018). Valuation and performance of reallocated IPO shares. Journal of Financial Markets, Institutions and Money, 54, 15–26. https://doi.org/10.1016/j.intfin.2017.05.005
Bradley, D. J., Jordan, B. D., & Ritter, J. R. (2003). The quiet period goes out with a bang. Journal of Finance, 58(1), 1–36. https://doi.org/10.1111/1540-6261.00517
Chahine, S. (2004). Long-run abnormal returns after IPOs and optimistic analysts’ forecasts. International Review of Financial Analysis, 13(1), 83–103. https://doi.org/10.1016/j.irfa.2004.01.004
Chen, Y., Goyal, A., Veeraraghavan, M., & Zolotoy, L. (2019). Media coverage and IPO pricing around the world. Journal of Financial and Quantitative Analysis (In press). https://doi.org/10.1017/S0022109019000486
Chowdhry, B., & Sherman, A. (1996a). The winner’s curse and international methods of allocating initial public offerings. Pacific-Basin Finance Journal, 4(1), 15–30. https://doi.org/10.1016/0927-538X(96)00004-2
Chowdhry, B., & Sherman, A. (1996b). International differences in oversubscription and underpricing of IPOs. Journal of Corporate Finance, 2(4), 359–381. https://doi.org/10.1016/0929-1199(96)00002-8
Clarke, J., Khurshed, A., Pande, A., & Singh, A. K. (2016). Sentiment traders and initial returns: The Indian evidence. Journal of Corporate Finance, 37, 24–37. https://doi.org/10.1016/j.jcorpfin.2015.10.007
Colaco, H. M. J., De Cesari, A., & Hegde, S. P. (2017). Retail investor attention and IPO valuation. European Financial Management, 23(4), 691–727. https://doi.org/10.1111/eufm.12113
Deloof, M., Maeseneire, W. D., & Inghelbrecht, K. (2009). How do investment banks value initial public offerings (IPOs)? Journal of Business Finance & Accounting, 36(1–2), 130–160. https://doi.org/10.1111/j.1468-5957.2008.02117.x
Derrien, F. (2005). IPO pricing in “hot” market conditions: who leaves money on the table? Journal of Finance, 60(1), 487–521. https://doi.org/10.1111/j.1540-6261.2005.00736.x
Derrien, F., & Womack, K. L. (2003). Auctions versus bookbuilding and the control of underpricing in hot IPO markets. Review of Financial Studies, 16(1), 31–61. https://doi.org/10.1093/rfs/16.1.0031
Durukan, M. B. (2002). The relationship between IPO returns and factors influencing IPO performance: case of the Istanbul Stock Exchange. Managerial Finance, 28(2), 18–38. https://doi.org/10.1108/03074350210767672
Firth, M., Li, Y., & Wang, S. S. (2008). Valuing IPOs using price-earnings multiples disclosed by IPO firms in an emerging capital market. Review of Pacific Basin Financial Markets and Policies, 11(3), 429–463. https://doi.org/10.1142/S0219091508001428
Francis, J., Olsson, P., & Oswald, D. R. (2000). Comparing the accuracy and explainability of dividend, free cash flow and abnormal earnings equity value estimates. Journal of Accounting Research, 38(1), 45–70. https://doi.org/10.2307/2672922
Gajewski, J. F., & Gresse, C. (2006). A survey of the European IPO market (ECMI Paper).
Haggard, K. S., & Xi, Y. (2017). IPO overvaluation and returns prior to lockup expiration. Managerial Finance, 43(12), 1392–1410. https://doi.org/10.1108/MF-05-2017-0172
How, J., Lam, J., & Yeo, J. (2007). The use of comparable firm approach in valuing Australian IPOs. International Review of Financial Analysis, 16(2), 99–115. https://doi.org/10.1016/j.irfa.2006.09.003
Hsu, Y., Hung, C., & Shiu, C. (2009). Why have IPO auctions lost market share to fixed-price offers? Evidence from Taiwan. Journal of Financial Studies, 17(1), 1–36. https://doi.org/10.6545/JFS.2009.17(3).1
Huang, H., Chiang, M., Lin, J., & Lin, Y. (2017). Fixed-price, auction, and bookbuilding IPOs: Empirical evidence in Taiwan. Finance Research Letters, 22, 11–19. https://doi.org/10.1016/j.frl.2017.04.002
Hundtofte, C. S., & Torstila, S. (2018). Evidence on anchoring to industry multiples in IPO pricing (Working paper). https://doi.org/10.2139/ssrn.2690869
Jenkinson, T., & Jones, H. (2004). Bids and allocations in European IPO bookbuilding. Journal of Finance, 59(5), 2309–2338. https://doi.org/10.1111/j.1540-6261.2004.00700.x
Kim, M., & Ritter, J. R. (1999). Valuing IPOs. Journal of Financial Economics, 53(3), 409–437. https://doi.org/10.1016/S0304-405X(99)00027-6
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. https://doi.org/10.1016/S1042-444X(99)00027-4
Ljungqvist, A., Nanda, V., & Singh, R. (2006). Hot markets, investor sentiment, and IPO pricing. Journal of Business, 79(4), 1667–1702. https://doi.org/10.1086/503644
Lopez, A. R., & Martin, G. R. (2019). The marketability discount in Spanish valuation multiples: Investors’ perception in listed companies versus private transactions. Journal of Business Economics and Management, 20(1), 107–130. https://doi.org/10.3846/jbem.2019.8101
Loughran, T., Ritter, J. R., & Rydqvist, K. (1994). Initial public offerings: international insights. PacificBasin Finance Journal, 2(2–3), 165–199. https://doi.org/10.1016/0927-538X(94)90016-7
Low, S., & Yong, O. (2011). Explaining over-subscription in fixed-price IPOs: Evidence from the Malaysian stock market. Emerging Markets Review, 12(3), 205–216. https://doi.org/10.1016/j.ememar.2011.03.003
Paleari, S., & Vismara, S. (2007). Over-optimism when pricing IPOs. Managerial Finance, 33(6), 352– 367. https://doi.org/10.1108/03074350710748722
Paleari, S., Signori, A., & Vismara, S. (2014). How do underwriters select peers when valuing IPOs? Financial Management, 43(4), 731–755. https://doi.org/10.1111/fima.12060
Pandey, A. (2004). Initial returns, long run performance and characteristics of issuers: Differences in Indian IPOs following fixed price and book building processes (Working Paper). Indian Institute of Management, Ahmedabad.
Purnanandam, A. K., & Swaminathan, B. (2004). Are IPOs really underpriced? Review of Financial Studies, 17(3), 811–848. https://doi.org/10.1093/rfs/hhg055
Ritter, J. R. (2003). Differences between European and American IPO markets. European Financial Management, 9(4), 421–434. https://doi.org/10.1111/1468-036X.00230
Ritter, J. R., & Welch, I. (2002). A review of IPO activity, pricing and allocations. Journal of Finance, 57(4), 1795–1828. https://doi.org/10.1111/1540-6261.00478
Rock, K. (1986). Why new issues are underpriced. Journal of Financial Economics, 15(1–2), 187–212. https://doi.org/10.1016/0304-405X(86)90054-1
Roosenboom, P. (2007). How do underwriters value IPOs? An empirical analysis of the French IPO market. Contemporary Accounting Research, 24(4), 1217–1243. https://doi.org/10.1506/car.24.4.7
Roosenboom, P. (2012). Valuing and pricing of IPOs. Journal of Banking and Finance, 36(6), 1653–1664. https://doi.org/10.1016/j.jbankfin.2012.01.009
Sherman, A. (2005). Global trends in IPO methods: Bookbuilding versus auctions with endogenous entry. Journal of Financial Economics, 78(3), 615–649. https://doi.org/10.1016/j.jfineco.2004.09.005
Shiller, R. J. (1990). Speculative prices and popular models. Journal of Economic Perspectives, 4(2), 55–65. https://doi.org/10.1257/jep.4.2.55
SPK. (2013a). Directive 128.VII.1 of the Capital Markets Board of 22 June 2013 on the Equity Issue. http://www.resmigazete.gov.tr/eskiler/2013/06/20130622-8.htm
SPK. (2013b). Bulletin 2013/5 of the Capital Markets Board of 12 February 2013 on the Equity Issue. http://spk.gov.tr/Bulten/Goster?year=2013&no=5
Tinic, S. M. (1988). Anatomy of initial public offerings of common stock. Journal of Finance, 43(4), 789–822. https://doi.org/10.1111/j.1540-6261.1988.tb02606.x
Vismara, S., Signori, A., & Paleari, S. (2015). Changes in underwriters’ selection of comparable firms pre- and post-IPO: Same bank, same company, different peers. Journal of Corporate Finance, 34, 235–250. https://doi.org/10.1016/j.jcorpfin.2015.07.010
Welch, I. (1992). Sequential sales, learning, and cascades. Journal of Finance, 47(2), 695–732. https://doi.org/10.2307/2329120