The impact of IFRS mandate and institutional governance on underpricing and aftermarket performance of IPO shares in Turkey

Abstract

Along with the European Union, policymakers in Turkey passed a regulation that mandated all listed companies use the International Financial Reporting Standards (IFRS) starting from January 1, 2005. Using a before-after estimation design, this study examines the impact of this policy change and the role of institutional governance quality on the initial trading day and aftermarket trading performance of initial public offerings (IPO) in Turkey from 1998 to 2019. The results show that the IFRS mandate does not affect initial trading day returns but improves the aftermarket trading performance of IPO shares. This finding may imply that Turkey’s secondary market also suffers from information asymmetry and that IFRS-compliant reports help alleviate this problem. Furthermore, none of the six institutional governance quality measures tested loaded significantly against initial trading day or long-term returns. However, when examined together, two institutional measures with a negative value, voice and accountability, and political stability, offset the positive effect of the IFRS-compliant reporting on long-term IPO returns, providing support to the premise that institutional quality matters for realizing the economic benefits of the IFRS mandate.