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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Notes
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.
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.
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.
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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Appendix
Appendix
List of variables.
Variables | Definition | Source |
|---|---|---|
Bias | Percentage deviation of the underwriters’ fair value estimate from the first day market capitalization. Bias is calculated as fair value minus first day value, divided by first day value. The fair value is the share price estimated by underwriters using various valuation models and disclosed in the valuation report before applying the discount. Fair value for book-building offerings is calculated as the midpoint of the price range estimate | Prospectus, valuation reports, own calculation |
DD | Percentage deliberate discount offered by underwriters over estimated fair value of the firm. The final offer price is obtained by applying this discount to the estimated fair price. DD for book-building offerings is the midpoint of the discount range | Prospectus, valuation reports |
OVAL | Dummy variable representing overvaluation bias, equal to 1 if the valuation bias of the offering is positive, 0 otherwise | Valuation reports, own calculation |
Length | Number of days from first trading date or prospectus publication date to the voluntary lock-up expiration date | Prospectus |
Short | Dummy variable representing lock-up period length, equal to 1 if period is 180 days or shorter, 0 otherwise | Prospectus |
PVL | Dummy variable representing pure voluntary lock-ups, equal to 1 if the IPO has only voluntary lock-up, 0 otherwise | Prospectus |
HBL | Dummy variable representing hybrid lock-ups, equal to 1 if the IPO has both voluntary and mandatory lock-ups, 0 otherwise | Prospectus |
SFL | Dummy variable representing small firm lock-ups, equal to 1 if the IPO has both voluntary and small firm lock-ups, 0 otherwise | Prospectus |
GIPL | Dummy variable representing GIP lock-ups, equal to 1 if the IPO firm is listed on GIP Market, 0 otherwise | Prospectus, post-issue reports |
FC | Dummy variable representing firm commitment offering method of underwriting, equal to 1 if the IPO is a firm commitment offering, 0 otherwise | Prospectus |
VC | Dummy variable representing venture capital sponsorship, equal to 1 if the firm is VC-backed prior to the IPO, 0 otherwise | Prospectus |
SharesLocked | Percentage incumbent shareholder equity locked, calculated as number of locked shares divided by the pre-issue insider equity | Prospectus |
PriceSupport | Dummy variable equal to 1 if underwriter implements price stabilization in the aftermarket, 0 otherwise | Post-issue reports |
CAR | Cumulative abnormal returns around lock-up expiration calculated relative to BIST All and BIST100 indices | BIST Data Store, own calculation |
InvMills | Inverse Mills ratio is computed from the Short probit regression in Eq. 1 to control for selection of lock-up length | Probit |
Age | IPO year minus incorporation year | Prospectus |
Size | Natural logarithm of the first day market capitalization | Own calculation |
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Tutuncu, L. Lock-up provisions and valuation of Turkish IPOs. Eurasian Bus Rev 10, 587–608 (2020). https://doi.org/10.1007/s40821-019-00144-7
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DOI: https://doi.org/10.1007/s40821-019-00144-7