Pricing of IPOs: The Unique Case of Turkish REITs

Abstract

The legal foundation of the Turkish Real Estate Investment Trust (REIT) structure, put in place in 1995, is considerably different and more complex than those observed elsewhere and predates those in Singapore, Japan, France, and the UK. Our paper builds on the unique legal and institutional details about Turkish REITs, as elaborated in Erol and Tirtiroglu (2011), and studies the pricing of their initial public offerings (IPO) between 1996 and September 2014. Turkish REITs enjoy complete flexibility in their dividend policy while being exempted from corporate taxes and also exhibit a legally mandated concentrated ownership structure. Further, they have some legally allowed flexibility in the asset allocation of their portfolios. While Turkey exhibits substantial macroeconomic uncertainty early on, it abates quite visibly, even during the Global Financial Crisis, since mid-2000s. We document empirically underpricing in the late 1990s and early 2000s and then fair or overpricing in late 2000s and early 2010s. This finding differs from those of no underpricing for REIT IPOs from the US market beyond the late 1990s. As a control sample, we also focus on all non-REIT Turkish IPOs issued during the same sample period and offer comparative evidence on the pricing of REIT and non-REIT IPOs.