Strategic financial policies in emerging country stock markets: the Turkish case

Abstract

For companies and organizations in emerging countries, such as those in Turkey, Hungary, and the Czech Republic, stock markets are fast becoming the primary financial market for investment purposes, and for making risk and strategic management decisions. Companies and organizations can use some well established rules in making strategic decisions. These rules are also known as anomalies, and one of the well known anomalies is 'January effect'. Stock returns of companies are significantly higher in the month of January compared to other months. In this study, all of the 326 companies traded at the Istanbul Stock Exchange (ISE) are used in order to present a definitive answer to the January effect issue. Several questions are dealt with. Does the January effect exist in the Turkish stock market? Can it be explained by the strategic management decisions of organizations related to tax? Or is it related to strategic risk management issues, i.e., higher risk in the month of January compared to other months? There are some studies which claim that the anomaly is not seen in recent years. On the other hand, some research has provided evidence that the anomaly has shifted to December of the previous year. The paper also tries to address this issue. Are returns in the month of December also statistically high compared to other months' returns? Is there a difference between the December and January returns? Has the puzzle disappeared in recent years? Using the longest sample to date, from 1986 through 2007, and the largest number of companies traded at the ISE, specifically 326 stocks, the answers to all these questions are examined. Results indicate that January effect does exist in the Turkish stock market. December returns are also significantly higher compared to other months and there is not a statistical difference between December and January returns. The results imply that strategic tax management decisions are not the primary reason behind the January effect. The fact that the anomaly has started to shift to December of the previous year also indicates a learning effect in the stock market providing evidence towards efficiency. The conclusions provide important directions for international strategic management decisions, financial policies of organizations, and in identifying potential markets in developing countries. Turkish stock market is a very good representative of a financial market in an emerging country. Evidence suggests that if organizations commit the excess funds to the stock market in the month of December and liquidate their positions at the end of January, highest returns will be generated within these two months in the Turkish stock market. Thus, the characteristics of the market, specifically the January effect, provide useful guideline in making good risk assessment and strategic investment decisions.