The impact of margin trading and regulatory policy on IPO underpricing: Evidence from Türkiye

Abstract

This study examines the impact of margin loans and accompanying regulatory changes on the underpricing of initial public offerings (IPOs) in Türkiye, with a focus on the wave of IPOs from 2020 to 2023—a period during which the number of IPOs and proceeds from them reached record highs. Analyzing data from 154 IPOs, we find an average initial return of 35 percent, which shows significant underpricing, with an estimated $1.93 billion left on the table. Using multivariate regression models, we identify an inverse relationship between margin loans and abnormal initial returns, which indicates that higher margin trading is correlated with lower initial returns. Moreover, we find that restrictive margin loan policies positively affect initial returns, likely due to asymmetric information, such that underwriters adjust underpricing to attract retail investors with limited market experience. In addition, our results show that changes in policy that favor retail investor allocations positively impact on initial returns, as underwriters, who are limited with regard to accessing informed bidders, adjust prices to attract investors. This study offers new insights into the IPO and margin trading literature and has implications for policymakers and emerging markets.