Regime Switch in Macroeconomic Conditions, Moral Hazard and Pricing of Initial Public Offerings

Prof. Dr. Doğan Tırtıroğlu

Department of Real Estate Management

Ryerson University


Invited by: Prof.Dr. A. Sevtap Kestel


Zoom Meeting ID: 984 0800 6920

Passcode: 724032

Date/Time: 18.01.2021 - 16.30

Abstract: Joint work with Belma OZTURKKAL and Basak TANYERI We posit a new hypothesis on the pricing of IPOs and provide evidence on it from IPOs issued in Turkey between 1989 and September 2020. The hypothesis focuses on how a sudden and unexpected regime switch in macroeconomic conditions, from decades-long high uncertainty to relative stability, affects the pricing of IPOs. We expect that macroeconomic stability should nurture (i) more IPOs, (ii) a shorter time length between two IPOs, and (iii) stylized findings, established internationally in the literature, to be more dominant. We take our empirical measure of macroeconomic fluctuations from the foreign exchange market. The February 2001 financial meltdown in Turkey is the switch event. The return generating process carries strongly the imprints of this meltdown, but not the other meltdowns witnessed during the sample period. Results from the *stability* ( *uncertainty*) regime are consistent with (differ starkly from) those reported for the developed economies, respectively. Remarkably and unexpectedly, high uncertainty "bleaches" even the well-established hot market effects on IPO initial-day returns. These are brand-new results in the literature and push macroeconomic uncertainty as a risk factor for IPOs to the forefront. Structural reforms to fend off the economic decay from the 2001 financial meltdown, including instituting a corporate debt market, have led to macroeconomic stability in Turkey. With that, the pricing of IPOs has become remarkably consistent with the well-established and stylized evidence from the developed economies. This paper also offers some preliminary work on a recent legal change with the aim to curb moral hazard in the IPO market in Turkey. Overall, Turkish issuers have left much less money on the table than others in the USA and elsewhere. This is another remarkable piece of finding and an addition to the rich list of puzzles of the IPO literature.

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Last Updated:
14/01/2021 - 13:37