Akademik Veri Yönetim Sistemi
ASSA Middle East Economic Association 2024 Meeting, Texas, Amerika Birleşik Devletleri, 4 - 07 Ocak 2024, (Yayınlanmadı)
Pricing of IPOs is a corporate event that is extensively researched in the literature and closely followed in the financial markets. Previous studies have shown that IPO shares provide significantly higher returns in the short run and have poor performance in the long run[1]. IPOs are also characterized by high information asymmetry and pricing difficulty. In such an environment, price limits are expected to have a significant impact on the price discovery process of IPO shares. In the literature, price limits are argued to increase stock price volatility and hinder the price discovery process. They are also argued to provide an opportunity for correcting the element of overreaction in stock pricing. Which of these effects dominate in the case of IPO shares is an interesting question in and of itself. This study aims to analyze the effect of ±10 percent price limit rule on the pricing of IPO shares in Borsa Istanbul, an emerging stock market.
There are some studies analyzing the effect of price limits on the evolution of IPO share prices in developed and developing markets. These studies show that price limits hinder the price discovery process (Kim and Yang, 2009; Ni and Huang, 2015) and increase the price volatility (Wu, Wang, and Li, 2018) of IPO shares. There are also studies analyzing the effect of price limits on IPO underpricing. Pettway and Kaneko (1996) and Liao et al. (2014) show a decrease in IPO underpricing after the removal of price limits whereas Dong and Huang (2022) report a significant increase in IPO underpricing after the implementation of price limits. Contrary to these findings, Thomadakis et al. (2014) document a significant decline in IPO underpricing during stricter price limit periods.
Motivated by the conflicting findings regarding the effect of price limits on the price discovery process of IPO shares and IPO underpricing, this study analyzes the impact of price limits on IPO pricing during different price limit environments in Borsa Istanbul. Until November 2013, trading took place in morning and afternoon sessions with a ±10 percent price limit imposed in each of these sessions, amounting to a total daily allowance of approximately 21% change in share prices. Since November 30, 2013, there has been a single trading session with a ±10 percent price limit in Borsa Istanbul. Therefore, it is possible to study the effect of these price limit changes on the efficient pricing of IPO shares in this market.
As an example, Alfa Solar Energy (ALFAS) had its IPO between November 9 and 11, 2022 with an offer price of TL58.50 and started trading on Borsa Istanbul on November 16, 2021. At the close of trading on its first trading day, the price of ALFAS shares increased by exactly 10%. Furthermore, for the following 13 trading days, the price of ALFAS shares continued to close at the upper +10% limit. As of April 26, 2023, ALFAS shares were valued at TL342.50. Since its first trading day on Borsa Istanbul, ALFAS shares had 30 upper limit hit days and 9 lower limit hit days. The evolution of the share price of ALFAS and the BIST 100 index is depicted in Figure 1 below.
The anecdotal evidence presented above is not unique to ALFAS shares. Of the 40 IPOs completed in 2022, only 12 did not have upper limit hit days immediately after their IPO. Furthermore, only 7 did not have any upper limit hit days in the first 74 trading days following their IPO. Evidence seems to support the hindrance of the price discovery process for IPOs completed in 2022 because of the price limit rule in Borsa Istanbul. This study makes contributions to two strands of literature. The findings of this study will have important implications for the effectiveness of price limits for controlling price volatility or hindering the price discovery for IPO shares. It will also contribute to the IPO underpricing literature in the presence of changing price limits. In addition to its contributions to the academic literature, the findings of this study will also have important policy implications for the regulators of Borsa Istanbul and other exchanges around the world with price limit rules.