Securities Market Design and Stock Market Segments for Small Company Shares: Empirical Evidence from Initial Public Offerings in Germany

In 1997 the “Neuer Markt” was opened as a stock market segment for small companies in Germany and initially performed well by attracting 329 initial public offerings (IPOs). It was closed in 2003 and listed companies were forced to transfer to either the higher ranked “Prime Standard” or to the lower ranked “General Standard”. We analyze the valuation effects of these “new economy” IPOs and whether the segment transfer decision could have been predicted with information that was available at the time of the IPO. Companies are more likely to change to the higher ranked Prime Standard if they are larger, more profitable, and have more growth opportunities. Firms that switch to the lower ranked General Standard improved the subsequent performance, suggesting that they are now traded on a market segment that better matches the firm characteristics with the listing requirements. Hence, designing different market segments that fit best with the heterogeneous characteristics of small companies are one avenue for convincing more companies to go public. Insight from this study may help with regard to establishing efficient and successful securities market segments for small company shares, which currently is intensively debated in many countries. Interestingly, Deutsche Börse announced another re-segmentation on November 21, 2016. This includes the closing of the Entry Standard and the opening of a new market segment for SMEs and growth companies on March 1, 2017.