Underpricing and Crises - IPO Performance in Germany

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 their attitudes to going public. Aftermarket performance of German IPOs confirms phenomena documented in other equity markets. Underpricing seems to be a small, but 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 IPOs during 1988B1992, 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 go 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.