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The Link between IPO Underpricing and Trading Volume: Evidence from the Istanbul Stock Exchange

  • Aydin Yüksel

    (Faculty of Business Administration, Bilkent University)

  • Asli Yüksel

    (Department of Management, Çankaya University)

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    Recent evidence from U.S. markets shows that IPO underpricing is associated with high liquidity for issuing firms. One explanation given for this link is that IPO firms simultaneously decide on share retention and underpricing to maximize aftermarket liquidity. We use data from the Istanbul Stock Exchange (ISE) to provide international evidence. Our results do not support the argument that IPO firms use underpricing as a tool to make up the reduction in liquidity caused by higher share retention. We report that there is an asymmetric relationship between underpricing and trading volume in the short run. However, the positive link between short term volume and long term volume, which is shown to exist in U.S. markets, is missing in the ISE. Based on the explanations in prior research, we argue that the lack of persistency in initial broad ownership and/or investor interest may be the reason for the missing link.

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    File URL: http://jefsite.org/RePEc/pep/journl/jef-2006-11-3-d-yuksel.pdf
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    Article provided by Pepperdine University, Graziadio School of Business and Management in its journal Journal of Entrepreneurial Finance and Business Ventures.

    Volume (Year): 11 (2006)
    Issue (Month): 3 (Fall)
    Pages: 57-78

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    Handle: RePEc:pep:journl:v:11:y:2006:i:3:p:57-78
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    1. Ritter, Jay R, 1991. " The Long-run Performance of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(1), pages 3-27, March.
    2. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
    3. Randolph P. Beatty & Jay R. Ritter, . "Investment Banking, Reputation and the Underpricing of Initial Public Offerings," Rodney L. White Center for Financial Research Working Papers 2-85, Wharton School Rodney L. White Center for Financial Research.
    4. Schultz, Paul H. & Zaman, Mir A., 1994. "Aftermarket support and underpricing of initial public offerings," Journal of Financial Economics, Elsevier, vol. 35(2), pages 199-219, April.
    5. 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.
    6. Bekaert, Geert & Harvey, Campbell R., 2002. "Research in emerging markets finance: looking to the future," Emerging Markets Review, Elsevier, vol. 3(4), pages 429-448, December.
    7. Baron, David P, 1982. " A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues," Journal of Finance, American Finance Association, vol. 37(4), pages 955-76, September.
    8. 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.
    9. Ritter, Jay R, 1984. "The "Hot Issue" Market of 1980," The Journal of Business, University of Chicago Press, vol. 57(2), pages 215-40, April.
    10. Ramazan Aktas & Mehmet Baha Karan & Kürsat Aydogan, 2003. "Forecasting Short Run Performance of Initial Public Offerings in the Istanbul Stock Exchange," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 8(1), pages 69-85, Spring.
    11. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
    12. Paudyal, K. & Saadouni, B. & Briston, R. J., 1998. "Privatisation initial public offerings in Malaysia: Initial premium and long-term performance," Pacific-Basin Finance Journal, Elsevier, vol. 6(5), pages 427-451, November.
    13. Mello, Antonio S. & Parsons, John E., 1998. "Going public and the ownership structure of the firm," Journal of Financial Economics, Elsevier, vol. 49(1), pages 79-109, July.
    14. Hanley, Kathleen Weiss, 1993. "The underpricing of initial public offerings and the partial adjustment phenomenon," Journal of Financial Economics, Elsevier, vol. 34(2), pages 231-250, October.
    15. Laurie Krigman & Wayne H. Shaw & Kent L. Womack, 1999. "The Persistence of IPO Mispricing and the Predictive Power of Flipping," Journal of Finance, American Finance Association, vol. 54(3), pages 1015-1044, 06.
    16. Stoughton, Neal M. & Zechner, Josef, 1998. "IPO-mechanisms, monitoring and ownership structure," Journal of Financial Economics, Elsevier, vol. 49(1), pages 45-77, July.
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