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Published in: Eurasian Business Review 4/2020

12-12-2019 | Regular Article

Lock-up provisions and valuation of Turkish IPOs

Author: Lokman Tutuncu

Published in: Eurasian Business Review | Issue 4/2020

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Abstract

I examine the association between lock-up length and valuation bias in a sample of 83 firms going public at Borsa Istanbul. The study is motivated by the fact that lock-up and valuation decisions are given simultaneously preceding the issue, so that lock-up information is incorporated into the valuation model. The problem is important because investors mostly rely on prospectuses to infer company value and make an informed investment decision. I hypothesize an inverse relationship between lock-up period length and valuation bias, on the basis that longer voluntary lock-ups would mitigate information asymmetry in the aftermarket and underwriters value issuers committed to long lock-ups more conservatively in anticipation. I find support for this prediction in the tests. Results show that issuers with long lock-ups are less overvalued relative to the issuers with short lock-ups, while signaling explanation of lock-ups is rejected for the Turkish market. The study contributes to the literature by showing that lock-up length selection plays a significant part in the pre-issue valuation, while market norms and concerns about regulations are paramount in the selection of lock-up length.

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Appendix
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Footnotes
1
Preconditions refer to the mandatory SFL and GIPL provisions that stipulate more stringent conditions to unlock such as a price rise exceeding 25% relative to the offer price and transfer to an upper market respectively.
 
2
The retail allocation in the Turkish market is large. The sample statistics for the 44 IPOs with available data show 66% (59%) average (median) retail investor allocation.
 
3
I investigate whether investors discount the insider opportunism and adjust their subscription level to the IPO based on the length of voluntary lock-up. In the subsample of 52 IPOs with available data, I find that the mean issuer with short (long) lock-up is oversubscribed 2.78 (2.35) times and the median issuer is oversubscribed 2.01 (1.45) times, with statistically insignificant differences. This result indicates that no adjustment to investor participation takes place based on the lock-up length.
 
4
This calculation assumes that the market is efficient. A better estimator of the bias that does not rely on that assumption would take the equilibrium market price as a reference point, however, I do not have access to this information. Therefore, I alternatively calculate the Bias variable using monthly average price and average lock-up period price instead of the first day price and find similar results. I refrain from measuring the Bias relative to the long-term prices (e.g. price at the lock-up expiration) due to the risk of overestimating the Bias, as share prices tend to decline around lock-up expiration and IPOs tend to underperform in the long-run. In addition, insiders and underwriters are less likely to simultaneously decide on the long-term value and lock-up length.
 
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Metadata
Title
Lock-up provisions and valuation of Turkish IPOs
Author
Lokman Tutuncu
Publication date
12-12-2019
Publisher
Springer International Publishing
Published in
Eurasian Business Review / Issue 4/2020
Print ISSN: 1309-4297
Electronic ISSN: 2147-4281
DOI
https://doi.org/10.1007/s40821-019-00144-7

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