Underpricing and Long-Term Performance of Initial Public Offerings at Germany ́s

This is the first large-scale examination of initial public offerings in the German market segment Neuer Markt. As such, it represents a powerful sample to examine the pricing process and long-run performance of the 325 initial public offerings taking place between 1997 and 2001 at the Neuer Markt. The initial returns seem to be higher in the “New Economy”; we find an mean initial return of 49.04% for our sample period. The total amount of money left on the table accumulated to around € 10 billion at the Neuer Markt between 1997 and 2001. The study provides support for the overperformance of initial public offerings over a 12 month holding period, which in the long-run turns into a slight underperformance. In this context we show the effects of using different benchmarks for measuring the abnormal performance. The relatively high abnormal returns with industry benchmarks may reflect the ability of the underwriters and the managers to issue when the stocks of firms from the same industry seem to be overvalued at the stock market. We show that value-weighting returns reduce the average initial return and increase the measured average longrun abnormal performance. Analyzing the bookbuilding price range, we find in contrast to previous studies, that the bookbuilding price spread cannot be used as a measure for the ex-ante price uncertainty of an individual stock. Finally, we compare the results with the other market segments at the Frankfurt Stock Exchange. We observe statistically significant differences in the initial returns among the market segments at the German capital market; the bookbuilding spreads are statistically not significant different. Our results may be specific to the time period and the market segment we studied in this paper; they provide support for a distinct effect by IPOs. JEL Codes: G10, G14, G32