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.

How discounts impact IPOs valuation performance and underpricing? A confrontation between warranted and unwarranted discounts

“…They explain that underwriters deliberately overestimate IPOs to justify applying high levels of discounts. Rasheed et al (2018), Roosenboom (2012) and Tutuncu (2020) find that discounts depend on valuation optimism. Additionally, Cassia et al (2004), Paleari et al (2014) and Vismara et al (2015) find that underwriters perform a biased selection of peers to overestimate IPOs.…”

“…Actually, only a limited number of studies examining IPOs discounts can be found due to the public unavailability of such information. Most of these studies report that discounts are applied to FVE before setting FOP (Cassia et al, 2004;Deloof et al, 2009;Paleari et al, 2014;Rasheed et al, 2018;Roosenboom, 2012;Tutuncu, 2020;Vismara et al, 2015). They explain that underwriters deliberately overestimate IPOs to justify applying high levels of discounts.…”

“…However, while underpricing and initial returns are identical because they both refer to the difference between MP and FOP, the same cannot be said about a discount. Actually, considering discount the same as underpricing and initial returns can be misleading because it does not represent the real discount applied by underwriters when valuing IPOs (Cassia et al, 2004;Deloof et al, 2009;Paleari et al, 2014;Rasheed et al, 2018;Roosenboom, 2012;Tutuncu, 2020;Vismara et al, 2015). This real discount refers rather to the difference between FOP and fair value estimate (FVE) for fixedprice offerings and preliminary offer price (POP) for book-building offerings (Roosenboom, 2012).…”

“…Yet, studies examining discounts are not that widespread due to public unavailability of such information. For instance, discount data are unavailable in US markets due to prohibitive disclosure regulations, while recent regulations in European markets allowed few studies in France, Belgium, Germany and Italy (Tutuncu, 2020). Nonetheless, studies engaging discount data document conflicting results regarding relation between discounts and underpricing (Deloof et al, 2009;Paleari et al, 2014;Roosenboom, 2012;Tutuncu, 2020;Vismara et al, 2015).…”

Pricing Mechanism and IPO Initial Return: Evidence from Pakistan Stock Exchange

“…The first day of abnormal positive return (underpricing) within Initial Public Offering (IPO) has been pragmatically proven in every financial market (Mohd-Rashid, Masih, Abdul-Rahim, & Che-Yahaya, 2018;Tutuncu, 2020). The anomaly of initial return is persistent, and this has also been reported in Pakistan, hence considered as a universal phenomenon (Aslam & Ullah, 2017;Khalid & Farhat, 2018;Sohail, Raheman, Zakaria, & Farhat, 2018a).…”