Journal of Multinational Financial Management

10 (2000) 213 – 227

www.elsevier.com/locate/econbase

The initial and aftermarket performance of

IPOs in an emerging market: evidence from
Istanbul stock exchange
Halil Kiymaz *
Department of Finance, School of Business Administration, Uni6ersity of Houston-Clear Lake,
Houston, TX 77058, USA
Received 21 November 1998; accepted 1 April 1999

Abstract

This paper empirically analyzes the initial and after-market returns for the Turkish initial
public offerings (IPOs) to provide an emerging market case of international evidence on
performances of IPOs. The sample consists of 163 firms listed and traded on the Istanbul
Stock Exchange during the period of 1990 – 1996. The results show that the Turkish IPOs are
underpriced on initial trading day on average of 13.1%. The initial underpricing is 11.7% for
industrial firms, 15% for financial firms and 17.6% for others. In terms of sub-sectors the
highest return is obtained in Tourism/Transportation group, while the lowest return is
observed in Machinery/Equipment group. With the exception of Banking group, all of the
sub-sectors experienced statistically significant initial underpricing. The investigation of
factors influencing the initial performance show that size of issuer, rising stock market
between the date of public offering and first trading day, institutional ownership, and
self-issued offerings are significant determinants of underpricing. © 2000 Elsevier Science
B.V. All rights reserved.

JEL classification: G14; G15; G24

Keywords: IPOs; Emerging markets; Istanbul stock exchange

* Tel.: + 1-281-2833208; fax: + 1-281-2833951.

E-mail address: kiymaz@cl.uh.edu (H. Kiymaz)

1042-444X/00/$ - see front matter © 2000 Elsevier Science B.V. All rights reserved.
PII: S 1 0 4 2 - 4 4 4 X ( 9 9 ) 0 0 0 2 7 - 4
214 H. Kiymaz / J. of Multi. Fin. Manag. 10 (2000) 213–227

1. Introduction

Numerous studies have examined the performance of initial public offerings

(IPOs) in several different markets. These studies document that the initial under-
pricing is a common phenomenon in every stock market, with the amount of
underpricing differing from one market to another. The majority of studies include
the equity markets of the US (Ibbotson, 1975; Ritter, 1984, 1991; Tinic, 1988;
Peavy, 1990), UK (Keasey and Short, 1992; Levis, 1993), Canada (Jog and Riding,
1987; Jog and Srivastava, 1994), Switzerland (Kunz and Aggarwal, 1994), Australia
(Lee et al., 1996a). There are relatively fewer studies on IPOs in the equity markets
of developing countries. Among them, Lee et al. (1996b) investigates IPOs in
Singapore; Kazantzis and Levis (1995) in Greece; Kim et al. (1995) in Korea,
Aggarwal et al. (1993) in Chile, Mexico and Brazil; and Dawson (1987) in
Hong-Kong, Singapore and Malaysia. These studies also report the existence of the
initial underpricing in these markets.
This paper extends the international literature on IPOs by examining the IPOs at
the Istanbul stock exchange (ISE). Specifically, both the initial and immediate
after-market performances of IPOs are analyzed. Furthermore, the factors influenc-
ing the initial performances of IPOs are investigated by employing some of the
explanations suggested in the IPOs literature.
The remainder of the paper proceeds as follows. In Section 2, literature on IPOs
and the history of the ISE are briefly reviewed. While data and methodology are
outlined in Section 3, the initial and after-market performances of IPO are
presented in Section 4. The variables employed to explain underpricing phe-
nomenon are defined in Section 5. The results of regression analysis are reported in
Section 6, while the final section provides a summary and conclusion.

2. Background

2.1. Emerging markets IPOs e6idence

The performances of IPOs are investigated extensively in several markets. A

number of studies conducted in the US reports the existence of inital underpricing
(Ibbotson, 1975; Aggarwal and Rivoli, 1990; Ritter, 1991). Ritter (1991), for
example, reports an initial underpricing of 14.3%. The IPOs performances are also
investigated internationally both in developed and developing stock markets. The
existing studies show that the initial underpricing is common in every stock market.
Ritter (1998) provides an excellent summary of the studies of IPOs around the
world. Table 1 reports a summary of studies on the performances of IPOs in
emerging markets. Among them, Dawson (1987) investigates both short- and
long-run performance of IPOs in Hong Kong, Singapore and Malaysia during the
period of 1978 – 1983. While Malaysian IPOs show the most extreme case of
underpricing with 166.6%, the average underpricing in Hong-Kong and in Singa-
pore are 13.8 and 39.4%, respectively.
 H. Kiymaz / J. of Multi. Fin. Manag. 10 (2000) 213–227 215

Table 1
Summary of previous studies on performances of initial public offerings (IPOs) in developing markets

Study Country Sample period Number of firms Initial return (%)

Lee et al. (1996a) Singapore 1973–92 132 31.4

Kazantzis and Levis (1995) Greece 1987–91 79 48.5*
Kim et al. (1995) Korea 1985–89 169 57.5*
Aggarwal et al. (1993) Brazil 1980–90 62 78.5*
Chile 1982–90 36 16.3
Mexico 1987–90 37 33.0
Dawson (1987) Hong-Kong 1978–84 21 13.8
Singapore 1978–84 39 39.4
Malaysia 1978–84 21 166.6

* Statistically significant at least at 5% level.

Aggarwal et al. (1993) examine the performance of 62 Brazilian (during 1980–90),

36 Chilean (during 1982 – 90), and 44 Mexican IPOs (during 1987–90). Results
indicate that the initial day returns are 78.5, 16.3 and 2.8% for Brazil, Chile and
Mexico, respectively. Kazantzis and Levis (1995) investigate IPOs in Greece with
using a sample of 79 firms going public between 1987 and 1991. The results show
that Greek IPOs are on average underpriced by 48.5%. Kim et al. (1995) examine
Korean IPOs of 169 firms during the period of 1985–89. The results reveal that the
Korean IPOs outperform seasoned firms with similar characteristics. Much of the
overperformance takes place during the first month, and long-run performance of
Korean IPOs is not statistically different from that of seasoned firms. Furthermore,
the deregulation, taking place in 1988, has reduced the initial underpricing, but it had
no impact on long-run IPO performance.
Lee et al. (1996a) investigate the initial and long-run returns for Singaporean IPOs
during the period of 1973 – 1993. They report an initial return of 30%, which is
positively related to the level of oversubscription and retained ownership. In the
long-run, no significant underperformance is detected. Kiymaz (1997) analyses the
factors affecting the performances of Turkish financial IPOs during the first 30 trading
days highly significant determinants of the performances of financial IPOs.
In summary, the existing studies on the emerging market IPOs consistently find
the presence of the initial underpricing. This paper aims to extend the IPOs literature
on emerging markets geographically by investigating the performances of the Turkish
IPOs in both the initial and immediate after-market periods.

2.2. History and structure of ISE

The ISE began its operation in 1986 and has been the only stock exchange in
Turkey.1 It has demonstrated a considerable growth since its establishment in 1986.

1
The capital market in Turkey remained relatively underdeveloped mainly because of (a) protection
from foreign competition, (b) that private firms are small and family owned, (c) that family controlled
firms had no incentives to issue equity to raise capital, and (d) that loans were cheap, easily obtainable,
especially if they were owned by their own bank.
216 H. Kiymaz / J. of Multi. Fin. Manag. 10 (2000) 213–227

The number of companies traded on the exchange climbed from 80 at the end of
1986 to 228 at the end of 1996. The National Market is the major component of the
ISE. There are also Regional, New Companies, and Watch-List Companies Mar-
kets. Most of the firms (93.4%) are traded at the National Market.2 The total
market capitalization of the firms traded has increased from US$ 938 million at the
end of 1986, to US$ 30.8 billion at the end of 1996. Another noticeable growth is
observed in the trading value, which has sharply increased from only US$ 13
million in 1986, to over US$ 51 billion in 1995. The listing requirements for the
securities presenting partnership are regulated by both the ISE and the Capital
Market Board. To get the listing of a security at exchange, the following conditions
are required: the number of shareholders must be above 100; at least 15% of the
paid-in capital must have been publicly offered; at least 3 years must have elapsed
since the incorporation date.3 The exchange administration normally determines
and approves a financial structure, which must be at a level to enable the company
to carry out its activities. The firm is also required to show a profit in the previous
2 consecutive years.4

3. Data and methodology

Panel A of Table 1 shows the sample selection. The population of the study
consists of 168 firms listed and subsequently traded on the ISE during the period of
January 1, 1990 and December 31, 1996. From this total, five firms are excluded
due to inadequate data, resulting in a sample of 163 firms. Panels B through D of
Table 2 provide selected characteristics of IPOs. Panel B of Table 2 reports the
distribution of IPOs and the gross proceeds by year. The highest number of IPOs
is observed in 1990 with 34 IPOs, followed by 29 IPOs in 1995. Furthermore, the
highest percentage (47%) of total proceeds is realized in 1990, followed by 16% in
1991. In terms of number of IPOs and the percentage of gross proceeds, 1990 seems
to a dominant issue year in Turkish IPOs market.5

2
At the end of 1996, 213 firms at National Market, 11 firms at Regional Market, one firm at New
Companies Market, and three firms were traded at Watch-List Companies Market. Due to the fact
that Regional Market, New Companies Market, and Watch-List Companies Market were launched
after 1995, all companies are traded between 1986 and 1994 were in National Market.
3
If at least 25% of the capital is held by more than 100 shareholders, this obligation is reduced to
2 years.
4
For the investment companies, some of these requirements may be waived by the written permis-
sion of Capital Market Board.
5
In order eliminate inflation induced bias, the total proceeds are expressed in terms of US dollar.
The proceeds are converted into US dollar by using the exchange rate on the last day of the public
offerings.
 H. Kiymaz / J. of Multi. Fin. Manag. 10 (2000) 213–227 217

Table 2
Sample selection and characteristics

Panel A: Sample selection

Number of IPOs during 1990–1996 Period 168
Less: firms with incomplete data 5
Net usable firms 163

Panel B: Frequency of IPOs and gross proceeds by years

Years No. IPOs Gross proceeds (000) ($) % of total

1990 34 1 128 180 47

1991 22 383 680 16
1992 12 80 037 3
1993 16 154 689 6
1994 25 272 908 11
1995 29 245 844 10
1996 25 146 497 76
Total 163 2 411 835 100

Panel C: Di6ision of IPOs and gross proceeds by sectors

Sectors No. IPOs Gross proceeds (000) ($) % of sectors % of total

Industrials 55
Food/beverage 12 92 881 7
Textile/apparels 23 174 885 13
Paper/publishing 14 98 183 7
Chemical/petroleum 12 292 032 22
Mineral products 16 248 452 19
Basic metal 6 31 779 3
Machinery equipment 21 377 802 29
Total 104 1 316 014 100
Financials 41
Banking 10 713 473 71
Insurance 7 76 870 8
Leasing/factoring 8 48 939 5
Holding/investment 21 154 743 16
Total 46 994 025 100
Others 4
Trade 8 54 752 54
Tourism/transportation 66 47 044 46
Total 14 101 796 100
Total 163 2 411 835 100

Panel D: Other characteristics of sample

No. firms % of total

Privatized IPOs 15 9
Non-privatized IPOs 148 91
Self-issued IPOs 30 18
Other IPOs 133 82
Sale of new issues 51 31
Sale of existing shares 112 69
218 H. Kiymaz / J. of Multi. Fin. Manag. 10 (2000) 213–227

Panel C of Table 2 reports the division of IPOs among sectors and the division
of proceeds by sectors. Of the 163 IPOs, 104 IPOs are classified as industrial, 46
IPOs as financial, and the remaining 14 IPOs as others. In the industrial sector,
Textile group is in the first place with 23 IPOs, followed by 21 IPOs in machinery/
equipment, in financial sector holding/investment group is in the first place with 21
IPOs followed by banking group with ten IPOs. In terms of the gross proceeds,
while machinery/equipment group takes the first place with 29% of the gross
proceeds in the industrial sector, the banking group has the first place in financial
sector with a share of 71%.
Panel D of Table 2 provides other information regarding to the sample. Out of
163 IPOs, 15 (9%) are IPOs taking place under the privatization program, 30 (18%)
are the self-issued IPOs, and 51 (31%) IPOs involve with the issuing new shares.
All share price data, date of going public, offer price, offer size, and other firm
specific information are obtained from the ISE.6
For each initial public offering, two short-run measures of performance are
calculated:
(1) The initial underpricing: while the initial raw return for each stock is defined
as relative price change from offer price to closing price at the end of first trading
day, the initial adjusted return is defined to be the initial raw return less the
corresponding market return on initial day.
(2) The aftermarket returns: the after-market adjusted return for each stock is
defined as relative price change from closing price at the end of first trading day to
closing price at the end of second day less the equivalent change in market return
and so on.7

4. Initial and after-market performances of IPOs

The initial and immediate after-market adjusted daily average abnormal returns
(AARs) are reported on Table 3. The initial market adjusted returns are 13.1% for
all firms. While the industrial sector experiences a market adjusted return of 11.7%,
the financial sector has a return of 15%, and the others have a return of 17.4%.
These returns are statistically significant at 1% level. In terms of sub-sectors, the
highest return is obtained in tourism/transportation group (25.4%); followed by
paper/publishing (16.6%); and holding/investment (15.2%). Market adjusted returns
are statistically significant for all sub-sectors with the exception of banking group,
which experiences an insignificant market adjusted return of 20.9%.

6
The total return for stock i in the period t is calculated as follows: Rit =Pit /Pi0 −1 where Pi,t is the
price of stock i at time t and Pi,0 is the offer price. The return on the ISE-Composite Index is calculated
the same way.
7
Standard event methodology is applied to calculate the average abnormal returns and the cumulative
abnormal returns for n firms in each sectors and sub-sectors. Standard event methodology is not spelled
out here.
Table 3
Initial and immediate after-market average abnormal returns (AARs) (%)

Sectors Firms Initial mkt. Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8
adj. Returns

H. Kiymaz / J. of Multi. Fin. Manag. 10 (2000) 213–227

All firms 163 13.1*** 4.2*** 0.7 1.5** 0.5 2.0 0.4 −0.4 0.0
Industrials 104 11.7*** 4.9** 0.1 1.5* 0.2 0.6 0.1 −0.1 0.3
Food/beverage 12 14.0*** 3.3* 1.4 6.4 1.3 0.9 0.5 0.5 −0.01
Textile/apparels 23 8.7*** 0.9 −1.5 −1.0 0.1 1.8 −0.4 1.5 2.5**
Paper/publishing 14 16.6* 1.9 0.2 3.0** 1.7 −1.5 −2.5 −4.9*** 0.1
Chemical/petroleum 12 13.9** 0.7 −0.7 1.0 −0.1 0.9 −0.4 −0.1 0.7
Mineral products 16 13.0*** 20.1 −2.2 0.8 −1.2 0.0 1.7 −0.4 −0.4
Basic metal 6 13.1*** −1.6 0.7 1.6 −4.2** −1.7 2.3 1.5 −2.0
Machinery equipment 21 7.7** 4.5*** 3.3** 1.2 0.3 1.4 0.8 0.6 −0.6
Financials 46 15.0*** 2.3 1.2 1.2 0.2 0.8 1.0 −1.3 −0.5
Banking 10 20.9 −1.1 −1.7 −0.6 −2.6* −1.4** 2.6** 0.0 1.1
Insurance 7 10.0*** −2.3 −0.5 −0.9 0.5 1.4 −0.4 −1.9 −2.7***
Leasing/factoring 8 11.6* 0.3 2.3 1.2 −0.2 1.4 1.1 0.4 0.0
Holding/investment 21 15.2*** 6.2** 2.6 2.9 1.7 1.4 0.6 −2.3* −0.8
Others 14 17.6*** 5.7** 3.4* 2.3 3.0 1.8 1.0 −0.1 −0.7
Trade 8 14.1* 2.9 0.8 0.5 3.4 −0.4 1.2 −0.5 0.4
Tourism/transportation 6 25.4*** 9.1* 6.2 3.7 1.3 4.4 1.8 1.9 −3.8

*** Indicates statistical significance at the 1% level.

** Indicates statistical significance at the 5% level.
* Indicates statistical significance at the 10% level.

219
220 H. Kiymaz / J. of Multi. Fin. Manag. 10 (2000) 213–227

The immediate after-market AARs indicate that only food/beverage, machinery/

equipment, holding/investment, and tourism/transportation groups continue to
enjoy statistically significant positive excess returns. Other sub-sectors have either
positive insignificant abnormal returns or negative significant abnormal returns.
The after-market cumulative abnormal returns (CARs) are reported on Table 4
for each sector and sub-sector, ranging from 2-day to 3-month period. For all of
the firms the results indicate that the underpricing continues to be present in the
first 4 weeks, but the magnitude of CARs seems to be increasing initially and
declining afterwards. For example, for all of the firms at the end of the first week,
CARs are 8.8%, and statistically significant at the 1% level. For the same period,
Industrials sector experiences CARs of 7.3%, while others group has CARs of
30.3%, and Financial sector has CARs of 5.7%. While the results of the first two
groups are statistically significant at 1%, that of the last group is only weakly
significant at 5%. When one looks at the longer after-market time periods (up to 3
months), it is noticed that almost none of the CARs for the sectors and sub-sectors
has statistically significant positive abnormal returns and the most of them experi-
ence insignificant negative abnormal returns. A notable point is that the sub-sec-
tors, experiencing relatively higher initial market adjusted returns, seem to
encounter relatively lower returns at the end of 3-month period. For example,
Paper/Publishing group has an initial market adjusted return of 16.6%, while it has
a 3-month market adjusted CARs of − 15.1%. Similarly, Banking group has initial
market adjusted return of 20.9% and a 3-month market adjusted return of − 13%.
These results show that the Turkish IPOs, similar to other international IPOs,
experience a statistically significant underpricing both on the initial day and in the
immediate after-market periods. These results are in line with those of other
international IPOs studies. But when the returns in a longer after-market time
period are investigated, the reversal of the initial positive abnormal returns is
observed.

5. Factors influencing the performances of IPOs

Table 5 reports the descriptive statistics and the correlation matrix of variables
employed as potential explanatory variables for the cross-sectional differences in
the initial underpricing.
There are a number of hypotheses regarding the possible explanation for IPOs.
Generally, the literature on under-pricing relates the under-pricing phenomena to
ex-ante uncertainty (Rock, 1986; Beatty and Ritter, 1986). In line with these studies,
a positive relationship between the level of underpricing and the level of ex-ante
uncertainty of a new issue is expected. Since it is not possible to measure ex-ante
uncertainty directly, a number of variables are used as proxies. There are three
variables used as proxies for ex-ante uncertainty in this study. These are the size of
firms, the gross proceeds from going public, and the age of the firms.
Firm size (SIZE): the total assets of the firm prior going public are commonly
used as size variable in IPOs studies. The size variable is employed to capture the
Table 4
After-marketa cumulative abnormal returns (CARs) (%)

Sectors Firms CAR CARs CARs CARs CARs CARs CARs CARs CARs
(2-day) (3-day) (4-day) (1-week) (2-week) (3-week) (4-week) (2-month) (3-month)

H. Kiymaz / J. of Multi. Fin. Manag. 10 (2000) 213–227

All Firms 163 4.9*** 6.4*** 6.8*** 8.8*** 8.6*** 7.1*** 4.7** 4.2 3.0
Industrials 104 5.0** 6.5*** 6.7*** 7.3*** 7.2*** 5.4** 4.8* 3.8 2.5
Food/beverage 12 4.6* 11.0** 12.3** 13.2** 11.1* 7.2 5.4 1.9 −1.9
Textile/apparels 23 −0.6 −1.7 −0.8 0.1 7.8** 10.0** 6.6 5.1 7.5
Paper/publishing 14 2.1 5.1* 6.8** 5.3* −2.7 −7.9 −11.3* −6.9 −15.1
Chemical/petroleum 12 −0.1 0.1 0.9 1.8 1.7 −2.8 −2.5 2.7 12.3
Mineral products 16 17.8 18.6* 17.4* 17.5* 15.0* 14.9* 19.8** 12.2 14.9
Basic metal 6 −0.8 0.7 −3.4 −5.1 −3.8 −5.5 −6.0 0.4 −1.5
Machinery equipment 21 7.8*** 9.0*** 9.3*** 10.7*** 10.6** 8.3* 8.2 5.8 −1.9
Financials 46 3.4* 4.7** 4.9** 5.7** 4.7 3.6 −2.5 −3.3 −3.6
Banking 10 −2.7 −3.3* −6.0** −7.3*** −1.8 −2.4 −11.6* −12.5 −13.0
Insurance 7 −2.8 −3.6 −3.2 −1.8 −6.9 −4.5 −4.14 −7.5 −13.3
Leasing/factoring 8 2.5 3.7 3.5 5.0 4.1 1.3 −1.6 −12.9 −6.9
Holding/investment 21 8.8 11.7*** 13.4*** 14.8*** 12.0** 10.0* 1.9 6.1* 5.4
Others 14 9.2*** 11.4*** 14.4*** 30.2*** 31.5*** 31.1*** 27.9*** 32.2*** 28.3**
Trade 8 3.6 4.1 7.5 7.1 7.2 3.5 1.8 5.1 9.8
Tourism/transport 6 15.3** 18.9** 20.2** 24.6 27.4 30.2 25.2 27.7 16.4

a
Excluding initial trading day; 1 week corresponds to 5 trading days, while 1 month corresponds 20 trading days.
*** Indicates statistical significance at the 1% level.
** Indicates statistical significance at the 5% level.
* Indicates statistical significance at the 10% level.

221
 222
H. Kiymaz / J. of Multi. Fin. Manag. 10 (2000) 213–227
Table 5
Descriptive statistics of variables

Variables Mean S.D. Correlation matrix

1 2 3 4 5 6 7 8 9

1. ADJRET 0.131 0.261 1.000

2. SIZE 11.120 1.981 −0.133 1.000
3. AGE 19.534 14.328 −0.144 0.176 1.000
4. PROCEEDS 8.684 1.368 −0.159 0.425 0.287 1.000
5. MARKET 0.055 0.174 0.347 0.027 −0.064 0.036 1.000
6. RATE 0.241 0.215 0.046 −0.302 −0.330 −0.103 0.082 1.000
7. INSOWN 0.499 0.303 −0.212 0.434 0.174 0.274 −0.137 −0.181 1.000
8. METHOD 0.306 0.462 −0.052 −0.087 −0.206 −0.085 0.086 0.164 −0.280 1.000
9. SELF-IPO 0.184 0.388 0.231 0.091 0.018 0.026 −0.124 0.047 0.067 −0.178 1.00
10. PRIV 0.092 0.289 −0.095 0.105 0.230 0.206 −0.099 0.114 0.242 −0.211 −0.151
 H. Kiymaz / J. of Multi. Fin. Manag. 10 (2000) 213–227 223

possibility that smaller firm IPOs are more speculative than those of larger firms.
Hence, the larger firms’ IPOs are expected to have lower uncertainty as compared
to the smaller IPOs. This variable is measured as the natural logarithm of the total
dollar value of assets at the end of year prior to the year of going public. A negative
coefficient is expected for this variable.
Proceeds (PROCEEDS) : the values of the gross proceeds are also employed to
measure the ex-ante uncertainty related to a new issue. The smaller amount of
proceeds may indicate a greater uncertainty about a firm’s future compared to a
larger amount of proceeds. The proceeds are converted into dollar amount by using
the exchange rate on the last day of public offering sales to remove the effect of
inflation. An inverse relationship between this variable and the initial underpricing
is expected.
Operating history (AGE) : the operating history of firm prior to going public is
also employed as a proxy for ex-ante uncertainty. Since older firms have more
information available to the public than younger firms do, the older firms are
expected to have lower ex-ante uncertainty compared to the younger firms. Hence
lower underpricing is expected for older firms. The age of the firm in years on
flotation is used as variable and expected to be inversely related to the level of
underpricing.
Market trend (MARKET): underpricing of IPOs may be a result of the rising
stock market between the fixing of the offer price and first trading day. As a test for
the institutional lag in the stock offering, this variable is constructed as the holding
period market (the ISE-Composite Index) returns from the last day of the public
offering to the first trading day. A positive relationship is expected.
Offer rate (RATE): the percentage of equity offered to public may signal the
quality of IPOs to investors. According to Leland and Pyle (1977), the private
information of pre-offering firm value is signaled to potential investors through the
percentage of equity retained. They hypothesize that the value of the firm is
positively related to the percentage of the equity retained in the firm by owners.
Keasey and Short (1992) argue that a relatively high percentage of equity retention
may reduce investors’ uncertainty because the firms’ owners have signaled their
faith in business. On the other hand, a greater percentage of equity retained by
owners may also be interpreted as less marketability of shares. In order to test the
effect of the percentage of equity offered to public, the offer rate variable is
employed. There is no pre-expectation regarding to the sign of this variable.
Pri6atization (PRIV): the privatization of government owned enterprises has been
taking place in Turkey in last 10 years. Some of the enterprises are privatized by
offering the existing shares of firms to public. To analyze the effects of privatization
on IPOs performance, a dummy variable is employed. Since the proceeds of
privatized firms will go to the government instead of firms, a higher level of
underpricing may be expected. On the other hand, public enterprises are generally
managed poorly and the main purpose of privatization is to increase the productiv-
ity of these firms. Hence, investors may expect better firm performance after the
privatization process, which may imply less expected underpricing. The variable
takes value of one if the IPO is taking place under the privatization program of
government, and zero otherwise.
224 H. Kiymaz / J. of Multi. Fin. Manag. 10 (2000) 213–227

Institutional ownership (INSOWN): in order to test the effect of ownership

structure on the initial performance of IPOs, the percentage institutional ownership
of firms’ stocks prior to going public is employed. Higher institutional ownership
may align shareholders interest and hence, an inverse relationship is expected.
Method of going public (METHOD): IPOs can be classified as either the offering
of new issues (i.e. primary) or the sales of previously issued outstanding shares (i.e.
secondary). In latter case, proceeds will go to the existing shareholders and these
funds may not be used for firms’ growth strategies. This may suggest a higher level
of underpricing. In former case, proceeds are used for the firm’s goals. This
institutional structure may provide an opportunity to test the impact of issuers’
motives in going public. A dummy variable is employed and takes the value of one
if offering is new issue, and zero otherwise.
Self-offered IPOs (SELF-IPO): Baron (1982)’s model proposes that investment
bankers have more information about demand for securities than issuer, and that
the quality of reputation of investment banker may indicate the quality of IPOs,
and can, therefore, generate more demand for new stock. In his model, investment
banker may profit from its information advantage by setting its issue price too low.
Muscarella and Vetsuypens (1989) tests this model for US firms, in which issuer
acts as underwriter for its own IPOs. In this case, no information asymmetry should
be expected and underpricing should disappear. They find no significant differences
in their two samples and provide evidence against information advantage of
investment banks. To test this explanation for Turkish IPOs, a dummy variable is
employed. This variable takes value of one if investment bankers underwrite their
own IPOs or one of family-firms’ IPOs, and zero otherwise.8

6. Cross-sectional regression results

The results of multivariate regression are reported on Table 6. Four variables

may act as potential proxies for ex-ante uncertainty about market performances,
namely firm size, proceeds, firm’s age, and self-IPOs. A positive relationship
between under-pricing and ex-ante uncertainty is expected. Additionally, the effects
of possible market movement, the influence of percentage offered to public, the
effect of ownership structure, the method of going to public, and privatization are
employed as other variables to explain IPOs performance.
Univariate regressions were initially performed with under-pricing as the depen-
dent variable, and statistically significant relationships were found for SIZE,
PROCEEDS, MARKET, INSOWN, SELF-IPO, and AGE variables. Then multi-
variate regressions were performed and the results are reported on Table 6. The first
regression indicates that while MARKET, and SELF-IPO variables have coeffi-

8
Turkish private sector mainly consists of family-owned groups of companies, which commonly
include a financial institution, and hence these groups may use a family owned financial institution as
investment banker. When family owned financial institution is used as investment banker in the process
of going public, these IPOs are considered under self-offering group.
 H. Kiymaz / J. of Multi. Fin. Manag. 10 (2000) 213–227 225

cients of 0.566 and 0.198, respectively, and are statistically significant at 1% level,
INSOWN variable with a coefficient of − 0.127 is weakly significant at 10%. The
market variable is intended to measure the effect of institutional lag on underpric-
ing. The results indicate that MARKET variable has expected sign, which is
statistically highly significant. The rising market between the offer price fixing time
and the first trading day is one of the important determinants of under-pricing. The
negative sign of INSOWN indicates that underpricing is lower in firms with higher
institutional holdings. The size variable was one of the proxies for ex-ante uncer-
tainty. The coefficient of this variable is − 0.038, indicating an inverse relationship
between firm size and under-pricing. The smaller firms would have greater under-
pricing, which is in line with expectations. The SELF-IPO variable is also highly
significant and has a positive coefficient of 0.154, indicating that self-offered IPOs
are underpriced more than others. This result contradicts with the hypothesis of
Baron (1982) and is in line with studies finding no support for this hypothesis (i.e.
Muscarella and Vetsuypens, 1989).

Table 6
Results of multiple regression analysisa

Variables 1 2 3 4

Constant 0.487 (3.37)*** 0.342 (2.88)*** 0.358 (2.99)*** 0.314 (3.01)***

SIZE −0.011 (−0.97) −0.017 (−1.71)* −0.024 (−2.44)** −0.022 (−2.44)**
AGE −0.002 (−0.14) – – –
PROCEEDS −0.018 (−0.16) – – –
MARKET 0.566 (5.31)*** 0.563 (5.26)*** 0.593 (5.48)*** 0.582 (5.53)***
RATE −0.105 (−1.07) −0.059 (−0.63) −0.051 (−0.55) –
INSOWN −0.127 (−1.80)* −0.135 (−1.90)* – –
METHOD −0.051 (−1.18) −0.046 (−1.07) −0.029 (−0.68) –
SELF−IPO 0.198 (3.99)*** 0.192 (3.87)*** 0.191 (3.82)*** 0.198 (4.18)***
PRIV 0.031 (0.63) 0.007 (0.11) 0.032 (0.45) –
R2 0.27 0.25 0.23 0.23
Adj. R 2 0.23 0.22 0.21 0.21
F-value 6.31*** 7.36*** 7.85*** 15.5***

a
Underpricing =b0+b1(size)+b2(age)+b3(proceeds)+b4(market)+b5(rate)+b6(priv)+b7(InsOwn)
+b8(method)+b9(self-IPO)+o ; where: underpricing =market adjusted initial return; size = natural
logarithm of the total assets of firm prior to offering; age = number of years in operation (operating
history) before offering; proceeds =natural logarithm of US dollar value of proceeds from offering;
market = market index returns from the last day of public offering to the first trading day; rate = percent
of equity offered to public; priv =a dummy variable taking on the value of one if IPO is done under
government privatization program and zero otherwise; InsOwn=percentage of ownership by institu-
tions; method =a dummy variable taking on the value of one if firm issues primary shares and zero
otherwise; Self-IPO = a dummy variable taking on the value of one if investment bankers underwrites
their own IPOs or one of family-firms’ IPOs and zero otherwise.
*** Indicates statistical significance at the 1% level.
** Indicates statistical significance at the 5% level.
* Indicates statistical significance at the 10% level.
226 H. Kiymaz / J. of Multi. Fin. Manag. 10 (2000) 213–227

RATE and AGE variables have the expected sign but they are not statistically
significant. Two other insignificant variables are PRIV and METHOD. The first
one has positive signs, indicating that privatized IPOs are more underpriced than
others, and the second variable has negative sign, indicating new issued IPOs are
less underpriced than previously issued stocks.
Regressions 2 – 4 report different combinations of variables employed. Three
variables are consistently significant, namely SIZE, MARKET and SELF-IPO.
These results indicate that initial underpricing in Turkish market is a result of rising
stock market and investment bankers’ underpricing issues possibly to leave a good
taste with investor. This would, in turn, provide firms a chance to sell future
offerings at a higher price than would, otherwise, be the case.

7. Summary and conclusion

The literature on the performance of IPOs suggests that investors purchasing

IPOs at the offer price earn abnormal returns on initial trading day. This paper
aims to provide an additional international evidence on the IPOs by examining the
Istanbul Stock Exchange, which is considered as one of the fastest growing
emerging markets. By using a sample of 163 firms listed and traded on the ISE, this
study investigates both the initial and after-market performances of IPOs. The
average market adjusted underpricing on the first trading day is found to be 13.6%
for all sample, 12.2% for industrials, 15.3% for financials, and 18.5% for others.
These results are highly significant and in the line with the results of other
international studies on IPOs. When the factors influencing the initial performance
of Turkish IPOs are investigated, size of issuer, rising stock market between the
time of price fixing and first trading day, and self issued offerings appear to be the
main determinants of the initial underpricing. Furthermore, the institutional owner-
ship variable seems to be weakly influencing the initial underpricing. The results
obtained from the self-offerings variable contradict with Baron (1982) hypothesis
but is in line with Muscarella and Vetsuypens (1989). There is also a support for the
ex-ante uncertainty measurements of Beatty and Ritter (1986) and Rock (1986).

Acknowledgements

I thank the participants at the 1997 meeting of European Financial Management

Association and the 1997 meeting of Financial Management Association Interna-
tional for their helpful suggestions to improve the paper.

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