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Article
Publication date: 30 November 2021

Lokman Tutuncu

This study aims to investigate whether underwriters exercise their allocation discretion to offer favorable discounts to institutional investors.

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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.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 15 no. 5
Type: Research Article
ISSN: 1753-8394

Keywords

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Article
Publication date: 1 November 2022

Lokman Tutuncu

The 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…

473

Abstract

Purpose

The 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/approach

The 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.

Findings

Pandemic 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/implications

This 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 implications

This 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 implications

Many 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/value

This 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.

Details

China Finance Review International, vol. 13 no. 3
Type: Research Article
ISSN: 2044-1398

Keywords

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Article
Publication date: 20 March 2019

Lokman Tutuncu

The purpose of this paper is to examine the effect of pre-acquisition earnings management on the performance of private firm management buyouts.

851

Abstract

Purpose

The purpose of this paper is to examine the effect of pre-acquisition earnings management on the performance of private firm management buyouts.

Design/methodology/approach

The study examines 291 UK private firms acquired by their managers between 2004 and 2012. Earnings management is investigated by means of cross-sectional discretionary accruals models, and estimated discretionary accruals are regressed on performance changes in the three years following acquisition.

Findings

Management buyouts of private firms are preceded by earnings overstatement and followed by performance deterioration. Private equity sponsored firms engage less in earnings management and remain more profitable than non-sponsored buyouts. Upward earnings managers cease to outperform industry after second post-buyout year, while aggressive earnings managers do not outperform industry at all. Discretionary total accruals are inversely associated with performance changes in the three years after buyout, and explain over 4 per cent of the changes in performance.

Research limitations/implications

Pertinent to the utilisation of private firms and their exemption from publishing cash flow statement, the study relies on accrual-based models for tests of earnings management.

Originality/value

The paper contributes to the mergers and acquisitions literature and value creation debate in buyouts by providing the first tests of earnings management and post-acquisition performance in private firm management buyouts.

Details

Managerial Finance, vol. 45 no. 10/11
Type: Research Article
ISSN: 0307-4358

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