Investor reactions to reform and institutional change: An empirical investigation on bonds traded in the Ottoman Empire and European markets

This study analyses investors' assessment of the corrective effects of fiscal and economic reforms. In this context, the study is based on a historical case, which is unlikely to be observed today, and which has introduced very comprehensive control processes even in the administrative system. This study utilizes bond price data from the Istanbul, London, Paris, and Berlin Stock Exchanges for the period between 1875-1885. Daily bond closing values are compiled from "The Times" for the European stock exchanges and various Ottoman newspapers for the Istanbul stock exchange. In the study, the General Debt Bond is used, which is selected among alternative bonds by taking data continuity into account. The reason for focusing mainly on bond price data is that fiscal and administrative reforms will be reflected in bond demand and price changes. For example, if reform has made the fiscal and administrative system efficient and investors have confidence in it, they will want to lend to the Ottoman Empire, which will increase the demand and price of bonds. In this context, efficient reforms will reduce price declines and volatility. During the research observation period, the Ottoman economy witnessed many reforms and institutional changes. The effects of reforms on risk and bond price volatility are investigated using the GARCH (1,1) model. As a result of the analyses, it was found that the impact of the implementation of the gold standard and the establishment of the Duyun-u Umumiye (Ottoman Public Debt Administration) in the Istanbul market, the declaration of the First Constitutional Monarchy in the London market, and the adoption of the gold standard in the Paris market on bond prices and investors was positive. On the other hand, in the Berlin market, due to the observation interval, it is only possible to analyze the effect of the Ottoman Public Debt Administration, and this effect is found to be weak in responding to investor expectations. In addition, it is observed that information with negative characteristics such as the Bosnian-Bulgarian rebellion received by the market is more important. In the Istanbul and European Stock Exchanges, it is observed that events that exceed national borders such as the social turmoil caused by riots, the financial burden brought about by the war conditions, and the political and geopolitical risks arising from the uncertainty of war are among the factors that create anxiety among investors and weaken confidence. Overall, the results do not provide evidence of favorable pricing for all reforms in all four markets. Crisis events at the time of the reforms, which are likely to have caused administrative and financial system impediments, may have weakened the positive effectiveness of the reforms. For an economy in the process of insolvency, reforms are insufficient in the context of war and an unstable environment to improve the solvency of an economy in the process of insolvency, making it difficult to change investor perceptions in such an environment.