Valuation of Opacity in Turkish Banking Industry

This study investigates Turkish banking industry in terms of opacity. Opacity can be defined as a market condition where consumers have limited information about each bank's asset portfolio and its ability to repay the debt. Recent studies proved that banking sector in general has an opaque nature and it is difficult for markets to evaluate their fair value. Such asymmetric information may lead banks to be vulnerable in times of internal and external disturbances. Turkey had experienced severe financial crises in the last decade because of its banking structure. Although banking system seemed to be progressed afterwards, its need to be realized that banking opacity continues to threats whole banks and so the economy. This study examines Turkish banks that are publicly traded in the Borsa Istanbul between 2003-2008. Banks are studied whether their opaque nature generates greater return than transparent assets. Second, it is identified whether opaque oriented banks have an influence on valuation discount of those banks. Finally, in order to assume that opacity creates systematic risk, the study investigates how opaque assets contribute to price synchronicity. Findings show that banks are better off when they invest more in opaque assets relative to transparent assets. It is also found that opaque assets create cost of equity capital hence greater valuation discounts necessity. Lastly it is statistically significant that opaque structure leads price synchronicity among Turkish stock market.