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Underpricing in Turkey: Comparison of the IPO Methods

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Author Info
Guray Kucukkocaoglu (Baskent University)

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Abstract

This paper addresses the question of what kind of selling and underwriting procedure might be preferred for controlling the amount and volatility of underpricing in the Istanbul Stock Exchange (ISE). Using 1993-2005 firm and issue data, we compare the three substantially different IPO methods available in the ISE. One is very similar to the book building mechanism used in the U.S., another is the fixed price offer, and the third one is the sale through the stock exchange method. The empirical analysis reveals significant first day underpricing of 7.01% in fixed price offer, 11.47% in book building mechanism, and 15.68% in sale through the stock exchange method. Finally, we also show that fixed price offers can better control the impact of market information on underpricing than sale through the stock exchange method

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Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2006 with number 8.

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Date of creation: 02 Feb 2007
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Handle: RePEc:mmf:mmfc06:8

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Related research
Keywords: ipo; book building; fixed price offer; istanbul stock exchange; emerging market;

Find related papers by JEL classification:
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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  1. Ivo Welch & Jay Rial Ritter, 2002. "A Review of IPO Activity, Pricing and Allocations," Yale School of Management Working Papers ysm258, Yale School of Management. [Downloadable!]
    Other versions:
  2. Welch, Ivo, 1992. " Sequential Sales, Learning, and Cascades," Journal of Finance, American Finance Association, vol. 47(2), pages 695-732, June. [Downloadable!] (restricted)
  3. Kandel, Shmuel & Sarig, Oded & Wohl, Avi, 1999. "The Demand for Stocks: An Analysis of IPO Auctions," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(2), pages 227-47.
  4. Welch, Ivo, 1989. " Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 44(2), pages 421-49, June. [Downloadable!] (restricted)
  5. Francesca Cornelli & David Goldreich, 2003. "Bookbuilding: How Informative Is the Order Book?," Journal of Finance, American Finance Association, vol. 58(4), pages 1415-1443, 08. [Downloadable!] (restricted)
  6. Kaneko, Takashi & Pettway, Richard H., 2003. "Auctions versus book building of Japanese IPOs," Pacific-Basin Finance Journal, Elsevier, vol. 11(4), pages 439-462, September. [Downloadable!] (restricted)
  7. Lawrence M. Benveniste & Paul A. Spindt, 1988. "Bringing new issues to market: a theory of underwriting," Finance and Economics Discussion Series 39, Board of Governors of the Federal Reserve System (U.S.).
  8. Francesca Cornelli, 2001. "Bookbuilding and Strategic Allocation," Journal of Finance, American Finance Association, vol. 56(6), pages 2337-2369, December. [Downloadable!] (restricted)
  9. Jay R. Ritter, 2003. "Differences between European and American IPO Markets," European Financial Management, Blackwell Publishing Ltd, vol. 9(4), pages 421-434. [Downloadable!] (restricted)
  10. Biais, Bruno & Bossaerts, Peter & Rochet, Jean-Charles, 2002. "An Optimal IPO Mechanism," Review of Economic Studies, Blackwell Publishing, vol. 69(1), pages 117-46, January.
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  11. Kiymaz, Halil, 2000. "The initial and aftermarket performance of IPOs in an emerging market: evidence from Istanbul stock exchange," Journal of Multinational Financial Management, Elsevier, vol. 10(2), pages 213-227, June. [Downloadable!] (restricted)
  12. Jenkinson, Tim & Ljungqvist, Alexander P & Wilhelm Jr, William J, 2000. "Has the Introduction of Bookbuilding Increased the Efficiency of International IPOs?," CEPR Discussion Papers 2484, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  13. Grinblatt, Mark & Hwang, Chuan Yang, 1989. " Signalling and the Pricing of New Issues," Journal of Finance, American Finance Association, vol. 44(2), pages 393-420, June. [Downloadable!] (restricted)
  14. Loughran, Tim & Ritter, Jay R. & Rydqvist, Kristian, 1994. "Initial public offerings: International insights," Pacific-Basin Finance Journal, Elsevier, vol. 2(2-3), pages 165-199, May. [Downloadable!] (restricted)
    Other versions:
  15. Biais, Bruno & Faugeron-Crouzet, Anne Marie, 2002. "IPO Auctions: English, Dutch, ... French, and Internet," Journal of Financial Intermediation, Elsevier, vol. 11(1), pages 9-36, January. [Downloadable!] (restricted)
    Other versions:
  16. Kenji Kutsuna & Richard L. Smith, . "Issue Cost and Method of IPO Underwriting: Japan's Change from Auction Method Pricing to Book Building," Claremont Colleges Working Papers 2000-35, Claremont Colleges. [Downloadable!]
  17. Chowdhry, Bhagwan & Sherman, Ann, 1996. "International differences in oversubscription and underpricing of IPOs," Journal of Corporate Finance, Elsevier, vol. 2(4), pages 359-381, July. [Downloadable!] (restricted)
  18. Moez Bennouri & Sonia Falconieri, 2001. "Price versus Quantity Discrimination in Optimal IPOs," Tinbergen Institute Discussion Papers 01-083/1, Tinbergen Institute. [Downloadable!]
  19. Ibbotson, Roger G., 1975. "Price performance of common stock new issues," Journal of Financial Economics, Elsevier, vol. 2(3), pages 235-272, September. [Downloadable!] (restricted)
  20. Sigrid Vandemaele, 2003. "Choice of Selling Mechanism at the IPO: the Case of the French Second Market," European Financial Management, Blackwell Publishing Ltd, vol. 9(4), pages 435-455. [Downloadable!] (restricted)
  21. Benveniste, Lawrence M. & Spindt, Paul A., 1989. "How investment bankers determine the offer price and allocation of new issues," Journal of Financial Economics, Elsevier, vol. 24(2), pages 343-361. [Downloadable!] (restricted)
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