Allocation discretion, price discounts and returns in Turkish initial public offerings

Abstract

Purpose This study aims to investigate whether underwriters exercise their allocation discretion to offer favorable discounts to institutional investors. Design/methodology/approach The research covers 173 offerings at Borsa Istanbul between 2010 and September 2021. Two hypotheses related to allocation discretion are developed and tested by means of probit, ordinary least squares and two-stage least squares regressions. Heckman selection regressions are used for robustness tests. Findings Allocation discretion is catered toward institutional investors who account for more than 56% of all initial allocations adjusted by gross proceeds. Close to 84% of all gross proceeds come from offerings that allocation discretion is exercised. These discretionary offerings are sold with larger price discounts, yet provide lower initial returns, while evidence points to reallocation to retail investors due to weak demand from institutional investors. Research limitations/implications Despite using the population of firms in the research period, the sample size is small relative to more developed markets. The research period cannot be extended because allocation discretion is allowed in 2010. Practical implications The research highlights the importance of institutional and foreign investors to the equity markets. This issue is relevant due to the ongoing flight of foreign investors from emerging economies and the increasing participation of small investors in the stock markets. Social implications The study cautions retail investors against greater (re)allocations by underwriters who may seek to compensate for the loss of their foreign investor base and urges policymakers to regain foreign investors. Originality/value To the best of the authors’ knowledge, this is the first research paper to use actual discounts disclosed in the prospectus to test the predictions related to allocation discretion. The study also contributes to the emerging markets literature by documenting allocation practices of the Turkish underwriters for the first time.

The changing investor demographics of an emerging IPO market during the COVID-19 pandemic

“…Finance literature emphasizes the importance of institutional investors for the success of IPOs and confines the role of retail investors mostly to providing liquidity in aftermarket trading. In Turkey, the predisposition to favor institutions was the norm similar to the US IPO allocations (Tutuncu, 2022). Recently, however, the market transitioned toward retail investor domination, and the heterogenous investment approach of domestic and foreign institutions became more obvious as the former increased their market share while the latter reduced it substantially.…”

“…Moreover, existing studies mostly cover early stages while this research covers two years of the pandemic, offering a fuller perspective. This study is closely related to Yildiz (2021) and Tutuncu (2022) who study institutional investment in the Turkish stock market, and impact of discretionary allocation on IPO returns. It complements a recent work by Pirgaip (2021) who shows that Turkish listed firms respond to pandemic-induced uncertainty with stock repurchases.…”

“…1. Moreover, oversubscription ratio is not available or reliable for companies that allocate shares on a first-come-first-served basis in nondiscretionary IPOs since demand collection is terminated when offering is fully subscribed. See Tutuncu (2022) for an overview of the discretionary and nondiscretionary allocations in the Turkish market.…”

Does media sentiment affect stock prices? Evidence from China’s STAR market

“…When examining the impact of media sentiment on the pricing efficiency of the primary market, we follow prior studies ( Wang and Wu, 2015 ; Tutuncu, 2022a ) and control the regression analysis to consider several aspects of underwriters and issuers, including underwriter reputation ( REP ), underwriting fee rate ( FR ), firm size ( SIZE ), auditor profile ( BIG4 ), and return on equity ( ROE ). Furthermore, taking into account the unique scientific and innovative characteristics of STAR-listed firms, variables such as the compound annual growth rate of business revenue ( GROWTH ) and the R&D ratio ( R&D ) are added.…”

IPO valuation in an emerging market – a study in Iran

“…As shown, the valuation has 11 links to other issues in the IPO context: most relationship belongs to mispricing, information asymmetry, performance and underwriting. They mainly have focused on IPO mispricing (Boulanouar and Alqahtani, 2016; Cotten, 2008; Gregory et al , 2010; Mehmood et al , 2021a; Rathnayake et al , 2019; Soongswang, 2017; Tutuncu, 2021; Tzang et al , 2021). According to our survey, only a few studies highlight the valuation methods used in evaluating initial offerings and their accuracy.…”