Underpricing and Crises - IPO Performance in Germany

Publication Date
Financial Markets Group Discussion Papers DP 252
Publication Authors

This analysis extends the international evidence on initial public offerings (IPOs) to new issues in Germany between 1988 and 1995. Germany has been among the countries which are undergoing major changes towards its attitude to 'going public' Aftermarket performance of German IPOs confirms phenomena documented in other equity markets. Underpricing seems to be small, but a consistent feature.

From the closing price on the first day of public trading to at least their three-year anniversaries, a set of 88 German Initial Public Offerings during 1988-1992 systematically underperformed at least two major benchmarks. There is also variation in the performance year-to-year, across industries and issue characteristics, with larger companies and companies with lower initial returns faring the worst. The strikingly high median age of 49 years for German IPOs suggests that the nature and incentive for the owners decision to 'going public' may be different to those for other IPO markets. The paper hypothesizes that the German IPO market is more a M&A market than a venture capital market which is indicated by proceeds flowing into maturing and declining rather than growing and dynamic industries. The patterns presented here are therefore consistent with an IPO market in which (1) positive market-adjusted aftermarket performance is a relatively short-run phenomena, (2) investors systematically overestimate earnings potentials and the probability of finding a big winner and (3) firms take advantage of these 'windows of opportunities' at the long-run cost of the investor.

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