Lock-up provisions and valuation of Turkish IPOs
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Lock‑up provisions and valuation of Turkish IPOs Lokman Tutuncu1 Received: 18 May 2019 / Revised: 6 November 2019 / Accepted: 9 November 2019 © Eurasia Business and Economics Society 2019
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 preissue valuation, while market norms and concerns about regulations are paramount in the selection of lock-up length. Keywords Initial public offerings · Lock-up length · Valuation · Expiration returns JEL Classification G14 · G30 · G32
1 Introduction This study investigates the association between lock-up length and valuation bias of initial public offerings (IPO). Prior research relates longer periods of lock-ups with the need for greater commitment to mitigate moral hazard (Brav and Gompers 2003), and to signal firm quality to alleviate adverse selection problems (Brau et al. 2005). I explore new grounds with an investigation of these explanations using valuation data. The motivation behind the study is the fact that lock-up and * Lokman Tutuncu [email protected] 1
Faculty of Economics and Management, Bulent Ecevit University, Zonguldak, Turkey
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Eurasian Business Review
corporate valuation decisions are simultaneously given and published in the prospectus preceding the IPO. Because lock-up provisions restrict insiders’ liberty of selling their equity in the post-issue period, one would expect them to anticipate this and incorporate the lock-up length decision into their valuation model (Brau et al. 2005). The investigation of the relationship between lock-up length and valuation is important because investors rely on the prospectuses and valuation reports to assess the company value and make an informed investment decision. They are; however, at an informational disadvantage and could be expropriated by insiders at the IPO and lock-up expiration if the issue is overvalued. I argue that insiders intent on expropriating investors by means of overvaluation opt for shorter voluntary lock-ups. In the short-term, less disclo
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