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

Abstract

PurposeThe last two years are characterized by record numbers of initial public offerings (IPOs), foreign investor abstinence and rising retail investor appetite in the Turkish stock market. This study aims to investigate whether retail investor dominance coupled with foreign investor aversion has significant impact on initial and short-term returns.Design/methodology/approachThe research covers the population of 188 companies going public at Borsa Istanbul from 2010 to the end of 2021. Three hypotheses are developed and tested by means of ordinary least squares and Tobit regressions to examine the association between investor allocations and returns. A new measure for retail investor trade size, average retail investment per capita (ARI) is utilized to explain the linkage between retail investor appetite and short-term returns. Two-stage least squares and Heckman selection regressions are employed for robustness tests to address potential endogeneity.FindingsPandemic IPOs provide significantly larger short-term returns than pre-pandemic IPOs measured up to one month. Underpricing during the pandemic is not significantly greater due to 10% daily price limit, which leads to a gradual release of retail investor appetite and increase in stock prices in the short term. Retail investors control 66% of the market during the pandemic compared to 35% before, while foreign institutional investor market share declines from 53% to 6%. Average retail investor number in an offering increases by 55.4-fold during the pandemic, resulting in substantially smaller allocations to the average individual investor. Greater returns during the pandemic are associated with smaller retail investment per capita, while domestic institutional investment is associated with lower returns as typically expected from institutional investors, although its significance disappears after controlling for potential endogeneity.Research limitations/implicationsThis study investigates returns up to one month. To better understand whether short-termism of retail investors and recent foreign investor aversion have detrimental effect on companies, and on the market as a whole, longer-term studies are needed. This is not possible at the current stage since not enough time has passed.Practical implicationsThis research is relevant to emerging market investors and companies due to the ongoing foreign investor aversion and fast-changing market conditions. The research cautions market participants against the short-termism of retail investors and urges policymakers to regain investors with longer investment horizons.Social implicationsMany newcomer retail investors are in the stock market due to lack of more profitable alternatives in Turkey. Although their participation is accompanied by larger short-term returns for the time being, the current momentum is unlikely to last long as the pandemic ends, and interest rates around the world begin to be raised. The study urges small investors to invest in a more informed manner and aim for longer time horizons, as it may not be possible to make a quick profit in the stock markets in the near future.Originality/valueThis is the first study to investigate changing investor profile in emerging markets and its impact on returns following pandemic declaration. The question is important because the investor composition affects the investment horizon in the market.

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

“…Since the outbreak of the COVID-19 pandemic, a growing stream of literature has discussed the upheaval it caused in the financial markets and its impact on investors ( Al-Awadhi et al, 2020 ; Schell et al, 2020 ; Bouri et al, 2021 ). Studies find that during the COVID-19 pandemic, individual investor participation increased ( Tutuncu, 2022b ), and their investing psychology became irrational and emotional ( Silalahi et al, 2020 ), which may in turn influenced the relationship between media sentiment and stock prices in the secondary market.…”

“…We argue that there are two reasons behind this phenomenon. One is that irrational individual investor participation increased with institutional investor decreasing during the pandemic ( Tutuncu, 2022b ), but the trading behavior of individual investors became more emotional. The other is that the outbreak of the COVID-19 pandemic created great uncertainty in the stock market, which influenced investors’ psychological and behavioral factors ( Hoffmann et al, 2013 ; Nabil and Elalfy, 2022 ).…”

“…Studies find that during the COVID-19 pandemic, individual investor participation increased (Tutuncu, 2022b), and their investing psychology became irrational and emotional (Silalahi et al, 2020), which may in turn influenced the relationship between media sentiment and stock prices in the secondary market.…”

“…To examine the impact of the pandemic on the relationship between media sentiment and IPO first-day stock performance, we take 11 March 2020 (i.e., the date on which the World Health Organization declared COVID-19 a pandemic) as the time node and separate our research sample into IPOs after the pandemic declaration (hereinafter COVID IPOs) and those before it (hereinafter non-COVID IPOs), then test the impact of media sentiment on first-day returns of COVID IPOs and non-COVID IPOs, respectively. (Tutuncu, 2022b), but the trading behavior of individual investors became more emotional. The other is that the outbreak of the COVID-19 pandemic created great uncertainty in the stock market, which influenced investors' psychological and behavioral factors (Hoffmann et al, 2013;Nabil and Elalfy, 2022).…”