The Effects of Introducing a New Stock Exchange on the IPO Process

8/4/2019 The Effects of Introducing a New Stock Exchange on the IPO Process

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The Effects of Introducing a New Stock

Exchange on the IPO process

Jrg Kukies*

* University of Chicago, Graduate School of Business

I wish to thank Steven Kaplan, Raghuram Rajan, Per Strmberg and Luigi Zingales as well as participants

in the JFI Symposium New Technologies, Financial Innovation and Intermediation at Boston College for

helpful comments. I also thank Hoppenstedt Verlag GmbH, Deutsche Brse AG, Deutsches Aktieninstitut,

the Federation International de Bourses de Valeur and Investor Relations departments at over 200 German

firms for providing data. I am grateful to the NASDAQ Education Foundation for providing me with

financial support during my Ph.D. studies. Comments would be greatly appreciated and can be sent to

[email protected].


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AbstractThis paper analyzes the effect of introducing new stock exchanges (New Markets) with strict disclosure

rules on the number and characteristics of IPOs. I find that the number of IPOs increases significantly after

the creation of such markets in a cross-section of 42 countries. Using data on privately held companies, I

find that the New Market in Germany allows small, young firms from industries with high research

intensity to go public.

I Introduction

In the recent literature, La Porta et. al. (1997) argue that the legal framework,

specifically the extent of investor protection, is a crucial determinant of IPO activity and

other measures of the importance of equity markets. On a similar note, Coffee (1999)

emphasizes the role of legal systems, specifically the protection of minority shareholders,in the development of active equity markets. However, Coffee also argues that higher

disclosure standards, by reducing agency costs and controlling opportunistic behavior by

majority shareholders, can facilitate access to equity markets. The question whether legal

standards such as investor protection rights are a prerequisite to the development of

vibrant equity markets or if alternatives such as increased disclosure can also foster such

a development is important in understanding how financial markets evolve, yet there is

little empirical evidence on the choice between these alternatives. The lack of research in

this area is particularly noticeable because a large number of countries is currently in the

process of trying to give capital markets a larger role. This paper attempts to show that

for these countries, the choice of information disclosure regime is an important policy

decision.

The creation of new equity markets in several European countries offers a unique

opportunity to study the effects of a change in disclosure rules while leaving the legal

framework constant. Starting in 1996 with the Nouveau March in Paris and quickly

followed by the Nieuwe Markt in Amsterdam, the Neuer Markt in Frankfurt and

Euro.NM in Brussels, these newly created stock exchanges use the approach of strict

disclosure rules based on private contracts between the exchanges and firms willing to

list as a method of attracting a new type of companies to the equity market, specifically

small, young growth firms. This process took place largely without government

involvement; namely, the creation of New Markets was not accompanied by any major


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legal changes to promote IPO activity, such as the improvement of investor rights.

Therefore, the creation of New Markets offers an interesting natural experiment to study

the effects of a change in disclosure rules while leaving the legal framework constant.

Increased disclosure can be a way of overcoming the problems of asymmetric

information faced by small growth firms when they attempt to raise equity capital.

As a consequence, the creation of a New Market should lead to an increase in the total

number of firms going public. The ability to precommit to an open disclosure policy by

listing on the New Market creates an avenue for IPOs of firms that are able to make such

a commitment and that did not have the possibility to credibly implement such a policy

before the creation of the new stock exchange. On the other hand, the type of mature

firms that went public on the standard markets before the existence of the New Market

still have the opportunity to do so; the IPO of an established firm in a mature industry on

the traditional exchange will not be perceived as a negative signal about the firms

quality.

The requirement of a credible precommitment to revealing information crucial to investor

decision-making constitutes a signaling mechanism which gives high-quality firms an

opportunity to separate themselves from low-quality rivals, thereby increasing investors

confidence in the New Market. In this sense, increased disclosure can be seen as apossible substitute for weak investor rights in the context of La Porta et. al. (1998).

The New Markets signaling mechanism based on disclosure should benefit the firms

with the largest amount of information asymmetries most strongly, namely young growth

firms characterized by the lack of a track record, complex technologies and uncertain

cash flows. Therefore, the characteristics of IPO firms should change after the creation of

the New Market.

This paper tests the two predictions on the quantity and characteristics of IPO firms

and finds evidence in favor of the above arguments. In a panel of 42 countries studied

from 1985 until 1999, the creation of New Markets with strict disclosure standards leads

to a statistically and economically significant increase in the number of IPOs controlling

for the level of stock market indices. This result is subject to the caveat of possible

endogeneity, as it is unclear if the creation of the New Market caused the increase in


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IPOs, or if a large number of firms willing to go public exerted pressure to create the new

exchange. As an attempt to address this issue of reverse causality, I show that in

countries which introduced a New Market with low disclosure requirements we observe

no significant effect on IPO activity.

My empirical analysis using a unique database on privately held German firms lends

support to the prediction on the change in the characteristics of IPO firms. I show that the

introduction of the New Market leads to a change in the composition of IPO firms in

favor of younger, smaller, technology-oriented firms with large growth potential.

Variables that proxy for growth opportunities tend to induce firms to choose the stricter

disclosure requirements of the New Market, whereas large, old firms select the

established exchanges for their IPOs. These effects have strong economic magnitudes; an

increase in the industry market-to-book ratio of a firm by one standard deviation

increases the probability going public on the New Market from 70% to 88%, whereas the

same increase in age decreases this probability to 44%.

The remainder of this paper is organized as follows. Section II discusses the related

literature and theories. Section III provides information on the structure of the New

Market. Section IV describes the data used, and section V presents the empirical results.

Section VI concludes.

II Theoretical Basis and Related Literature

The observation that forms the basis for the theoretical predictions in this paper is that

the New Markets discussed above combine an absence of traditional listing requirements

such as age, size and profitability records with strict disclosure rules. For example, the

New Market in Frankfurt sets itself apart from the established exchange by requiring

financial reporting according to international standards instead of the more opaque

German commercial code as well as by increasing the frequency with which firms are

required to report financial information. It also imposes stricter lock-in rules on existing

shareholders than the established exchange (a detailed discussion of institutional facts can

be found in section III).


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These rules can be seen as an attempt to alleviate information asymmetry problems

for investors who have incomplete information about the quality of IPO firms. Given the

stricter disclosure and lock-up requirements, a listing on the New Market can be

interpreted as a signaling device for high firm quality. A precommitment to the New

Markets strict information rules is very costly to an insider subject to lock-up rules who

has negative information about the future prospects of his firm, as the revelation of this

information becomes more likely. A separating equilibrium where low-quality firms are

discouraged from going public and in which the firms that do go public voluntarily

disclose large amounts of information in turn should attract demand from investors that

rely on such information. It is interesting to observe that demand on the New Market is

driven by small individual investors, who according to newspaper reports hold 50-70% of

the shares traded, compared to 18% on the established markets (Deutsches Aktieninstitut

(1998)). The fact that the New Market seems to disproportionately attract the investors

that rely most heavily on publicly available information gives some support to the

argument above.

Since the signaling device of a listing on the New Market did not exist prior to 1997, a

potential effect of the stricter listing requirements could be to provide a precommitment

mechanism that allows high-quality firms to overcome the effects of asymmetricinformation which tend to discourage raising equity capital in the model of Myers and

Majluf (1984). An important element of this process is that violation of the required

information disclosure rules must be costly in order to make the precommitment to

inform credible: simply announcing an open disclosure policy, as was obviously possible

before the New Market was created, has no value if violations of this announcement are

not punished. The New Market commits to strictly enforcing its information

requirements, and has recently forced two firms (Lsch Umweltschutz and Sero) to

change listings to the standard exchange for providing faulty financial information.

Since the effects of asymmetric information are likely to be highest for firms without

established track records and with complex products yielding uncertain cash flows far in

the future, young, high-quality technology firms should benefit most from the availability

of a market segment that allows them to separate themselves from lower-quality


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competitors and thereby achieve a higher valuation of their equity, in turn increasing their

propensity to go public.

This paper is related to different strands of the empirical and theoretical literature. On

the empirical side, La Porta, Lopez-de-Silanes, Shleifer and Vishny (1997) document a

significantly lower number of IPOs and publicly traded firms relative to total population

in countries of French or German as compared to English legal origin. They argue that

the lack of investor protection rights in civil law countries is important in explaining the

small role that equity markets play in these countries. It will therefore be interesting to

see the effects of attempting to increase the role of equity markets in Germany, which

ranks in the lowest quartile of countries with respect to investor rights in their paper. This

is particularly true because no substantial effort was made in Germany to improve

investor rights concurrently with the introduction of the New Market. Specifically, none

of the six key investor rights identified by La Porta et. al. (1997) was changed in

Germany in the time period studied here.

As to characteristics of firms going public, Rydqvist and Hgholm (1995) find that

European IPO firms tend to be established firms from mature industries, an observation

confirmed by Pagano, Panetta and Zingales (1998) for the case of Italy. Corwin and

Harris (1998) and Gompers (1996) show that IPO firms in the US are at the opposite sideof the maturity spectrum, with an average age of around 6 years.

Several theoretical papers model the effects of listing requirements established for the

New Market such as increased disclosure and stricter lock-up requirements for existing

owners. In Leland and Pyle (1977), the willingness of individuals with inside information

to commit to an investment in their firm serves as a signal to outsiders about the true

quality of the firm. Diamond and Verecchia (1991) study the general implications of

information disclosure policy and argue that a policy of information disclosure is

beneficial to shareholders since it increases liquidity by attracting the demand of large

investors. Similarly, Diamond (1985) shows that the value of public releases of

information is that they homogenize information and reduce the use of investor resources

to produce information, thereby increasing demand. To the contrast, Yosha (1995) argues

that disclosing information is a disadvantage to firms, since it provides valuable insights


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for competitors and thereby puts the disclosing firm at a disadvantage. He predicts that

high-quality, innovative firms prefer bilateral financing arrangements in order to avoid

disclosure of private information. Cheung and Lee (1995) counter this argument by

showing that given exchanges with different disclosure requirements, listing in the

market with the more rigorous rules might serve as a signal of firm quality. The value of

the signal to a high-quality firm might be sufficiently high to offset the costs resulting

from its disclosure of important private information, which might benefit its rivals.

III New Markets

Several Continental European countries, in an effort to alleviate the paucity of equity

capital for young, small growth firms, have created new equity markets in the past two to

three years. The common characteristic of these new markets is that they combine

leniency with respect to traditional listing requirements such as size, age or profitability

record with rigid reglementation of the information and disclosure rules that firms must

follow before and after the IPO. Specifically, five newly formed European exchanges1

have joined to create EURO.NM, a loose association in the legal form of a European

Economic Interest Group. Interestingly, all five new markets were created by the

traditional exchanges, thus setting a contrast to the fiercely competitive environment in

which NASDAQ squares off with its rival exchange NYSE. In competition with

EASDAQ, an exchange based in Brussels founded in 1996 by venture capitalists,

investment bankers, securities dealers and investment institutions from Europe, Israel and

the US, these New Markets strive to attract firms to equity finance that were previously

either unwilling or unable to raise capital by issuing publicly traded shares.

Beyond giving some cross-sectional evidence using international data, this paper

focuses on the effects of one particular example of a recently founded stock market, the

New Market in Frankfurt. The German economy is often characterized as the prototype

of a bank-based system in which equity finance plays only a marginal role, firms are

financed predominantly through loans obtained from banks with whom they have long-

1

The Nieuwe Markt in Amsterdam, the EURO.NM Brussels, the Neuer Markt in Frankfurt, the Nouveau

Marche in Paris, and (recently) the Nuovo Mercato in Milan


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term relationships and who often hold substantial ownership stakes in the firms, and in

which shareholders in public companies enjoy minimal levels of investor protection. The

bank-based system of finance is prevalent in most countries of Continental Europe, and

contrasts sharply with the Anglo-Saxon system, in which arms length debt and equity

markets play major roles. Since the example of Germany is representative for the

financial system of several other European countries, the insights from this paper will be

valuable to understand the effects of a transformation of bank-based systems with low

levels of investor protection towards giving equity markets a larger role.

The Frankfurt New Market was created in March 1997 as an attempt to improve the

flow of equity capital to the small, young technology firms with high growth potential

that very rarely went public in Germany or other Continental European countries. (see

Deutsche Brse AG (1999)). Similar to other European countries that introduced this type

of stock market, the Frankfurt New Market requires no minimum age, size or profitability

record of firms wishing to go public. For the case of Germany, this does not separate the

new from established markets, however: no size or profitability requirements existed and

firms of any age could go public on the second segment of the traditional exchange 2 prior

to 1997. The New Market does, however, differ substantially from the established

markets by imposing stricter information and disclosure rules

3

. Specifically, firms thatwish to list on the New Market must first be admitted on the standard markets second

segment, and then apply to be listed for trading on the New Market. Beside the disclosure

rules, listing on the New Market also requires firms to prove that they meet the desired

profile of New Market listings. This profile is not defined objectively, but Deutsche

Brse AG (1999) outlines that firms listed are typically expected to have a strong future

and above-average sales and earnings prospects. This explicitly does not mean to

exclude firms from traditional industries, which can qualify for listing if they offer new

2 listing requirements on the established first and second segment markets are very similar, so that these

segments will be treated together in the remainder of this paper.3

In the words of the German Stock Exchange (Deutsche Br se AG (1999)), Neuer Markt sets far higher

standards than the traditional first and second segment markets. ... A key feature of Neuer Markt is the

exceptional transparency companies show toward investors. Corporations listed in Neuer Markt have a

pro-active stance toward disclosing information to the capital market, favor shareholder value, and respond

actively to investors' information needs.


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products or services or take an innovative approach to business processes. In practice 4

firms wishing to list give a presentation to the listing committee explaining why they fit

the profile of the New Market. The listing committee, after communicating with the

applicants lead underwriter, then makes its admission decision. In the past, it rejected

roughly 20% of the applications; the results from this deliberation are highly confidential

and not accessible to researchers.

Specifics of the New Markets listing requirements are in Deutsche Brse AG (1999).

Key requirements which separate the New Market from the traditional segments are that

IPO firms must publish a more detailed listing prospectus, precommit to publishing

quarterly reports, hold annual analyst meetings and publish their accounts according to

either International Accounting standards or the Generally Accepted Accounting

Standards of the US (US-GAAP). As discussed in section III, both of these accounting

standards, which are very similar to each other, are generally considered to give a more

accurate depiction of a firms financial status than the rules of the German Commercial

Code. Further listing requirements specific to the New Market are that only voting shares

can be issued in the IPO and that pre-IPO shareholders must hold their shares for at least

six months after their firm goes public; no such lock-up period exists on the established

market.

IV Data

A Data description

The data used in this paper comes from several sources. I obtain balance sheet data

from Hoppenstedt Publishers, listing prospectuses, Datastream and Global Vantage.

Information on characteristics of the firms going public such as age, venture capital

financing and main business field comes from listing prospectuses. IPOs are identified

using the Factbook of the Deutsche Brse AG, the IPO database of Brse-Online

magazine, back issues of GoingPublic magazine as well Deutsche Morgan Grenfell

(1998). Data on stock market valuations is from Datastream, Global Vantage and the

4

special thanks to Joseph Tobien (Head of Listing, Deutsche Brse AG) for valuable insights on this and

other matters


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German Stock Exchange. Information on IPOs in countries other than Germany comes

from the Federation Internationale de Bourses de Valeurs (FIBV) as well as individual

exchanges.

The database of Hoppenstedt publishers is to my knowledge the most comprehensive

database on German firms accessible to researchers. It covers approximately 6,500 firms,

with data ranging back until 1981. Hoppenstedt uses annual reports, data from the

Bundesanzeiger, where firms fulfilling certain size criteria are required to publish their

accounts, as well as data from the Commercial Registers, to which all limited liability

firms must submit their balance sheets and income statements. I have access to the full

database, but a major change in accounting laws rules out the use of data before 1987.

Also, the number of firms covered in the database increases substantially starting in 1993,

so that I use that year as the start of my sampling period. The data is complete until 1998.

Since the balance sheet information of a given year is used to predict the probability of

going public in the following year, and since I need one year of data to compute sales

growth, I study the IPOs from 1995 until 1999. Since I am only interested in the initial

listing decision, firms are dropped if they were already publicly traded at the start of the

sampling period, and firms are dropped after they go public. Financials and insurances

are also dropped since their balance sheet data is not comparable with the other firms.Where applicable, I use consolidated balance sheets. Also, I delete data that was

backfilled after a new firm is introduced into the database as described below. My final

sample covers 15,564 firm-years for 3,875 companies.

Although the database is to my knowledge the most reliable and comprehensive

collection of financial statements data available for Germany, it is not unproblematic for

my purposes.

A first obvious issue is selection bias. There is no question that the database is biased

towards including large firms. A first reason for this is that disclosure requirements vary

according to firm size in Germany. If and to what extent firms are required to disclose

balance sheet and income statement information5 is a function of their legal form of

incorporation, revenues, total assets and number of employees. Also, all publicly traded

5 German firms are not required to file statements of cash flows


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firms are required to fulfill the same disclosure requirements as the largest group of

firms. These requirements will bias any collection of accounting data towards large firms

and encourage the inclusion of publicly traded firms. A further reason for selection bias is

the lax enforcement of compliance to the requirement to file financial information. The

smallest firms, which are required to file only with the Commercial Registers, face very

limited penalties if they fail to do so, and legal action upon violation of the requirement

to file with the Commercial Registers can only be taken by company insiders such as

minority owners or the employee council. Finally, selection bias is induced by the

commercial interests of the data provider. Since Hoppenstedt sells its information to

corporate clients, it has an obvious interest in including companies that conduct a large

amount of business with other firms, also biasing the sample towards large firms.

For these reasons, it would certainly be unjustified to claim that my database is a

representative sample of all German firms. However, my main objective is to study the

differences in IPO probabilities in two time periods, before and after the introduction of

the New Market in 1997. Therefore, the issue of selection bias becomes less problematic

to the extent that the bias remains constant over the full time period considered. To

address this issue, I verify that the size characteristics of the total sample do not vary

substantially over the time period considered. I find that I cannot reject the nullhypothesis that the average firm size is constant for any sequence of years in my sample.

A second issue is the backfilling of data, i.e., information being inserted into the

sample retroactively when a firm is newly introduced into the database. This is certainly a

difficulty, since Hoppenstedt has an obvious interest in facilitating a comparison with

financial information from earlier years when a firm is introduced into the database. A

source of systematic backfilling of data could be the inclusion of firms that do IPOs into

the database. This is plausible, since the data provider has an obvious interest in giving

information on the historical evolution of newly listed firms to its clients. This creates a

bias in my sample: a small firm that ended up going public has a much higher chance of

having data in the years prior to its IPO than a small firm that did not end up going

public. If data on a large number of small firms is present in the sample only because they

ended up going public, the coefficient estimates on the size variable will be artificially


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low. I solve the problems associated with backfilling by obtaining copies of the

Hoppenstedt database back until 1995, the earliest point in time where copies of the

database exist. I then construct the two subsamples, that before and that after 1997, by

using only the data on firms that were present in the database at the beginning of the

sampling period, and by adding on the data for later years only for these firms. I believe

that this paper is the first to use such a comprehensive, backfilling-free dataset on

privately held German firms.

The sample of IPO firms is obtained by collecting the available sales prospectuses of

the 307 firms that were listed in the sources cited below as going public on a German

stock exchange between March of 1997, the date the New Market was founded, and the

end of December 1999. The information on IPOs in the Factbook published by the

German Stock Exchange is supplemented with information on IPOs contained in the

database of Brse-online magazine, previous editions of GoingPublic magazine, from all

banks that acted as lead underwriters to the IPOs in my sample as well as from the

Factbook of the Deutsches Aktieninstitut (1998). The fact that these sources of

information complement each other explains that I have a larger number of IPOs than is

contained in the individual sources.

I exclude the small number of firms that listed in Germany after an initial publicoffering on non-German exchanges such as NASDAQ as well as firms that re-listed their

shares after delisting and restructuring, or after having been taken private from my

sample. Since my focus is on the initial decision of a privately held firm to go public, the

exclusion of these firms, which are listed as IPOs in some sources, appears plausible. I

also exclude firms that went public on regional exchanges, since these markets vary

widely in listing requirements. These selection criteria leave me with a sample of 245

non-financial IPOs. Of these, I obtained IPO prospectuses from 226 firms.

Although the level of informativeness varies according to the exchange on which a

firm lists, almost all prospectuses contain previous balance sheets as well as information

on a firms main business, age and major shareholders. Where applicable, I use

consolidated balance sheets. Firms going public on the New Market are required to file

accounting statements in accordance with U.S.-GAAP or IAS, which differ from German


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standards in some aspects. The basic difference in the intention of these systems reflects a

major distinction between the Anglo-Saxon and the Continental European economic

system: while US-GAAP and IAS emphasize the need to provide up-to-date information

relevant for a shareholders decisions, the German trade code HGB is guided by

conservative valuation of assets and protection of creditors interests. For example, these

differences are reflected in the US-GAAPs restrictiveness and the HGBs leniency

toward forming provisions, the requirement of market valuation of financial assets in the

US where the German code requires using the lower of purchase cost and market value or

the German imparity principle according to which only unrealized losses, not unrealized

gains are to be included in the income statement. To have a homogenous sample, I use

the data computed according to HGB, where available; few firms going public on the

standard exchanges provide data according to US-GAAP, but a large number of New

Market-IPOs publish data on the basis of both methods.

B Variables

I use a variety of variables to capture firm-specific characteristics. Measures of size

are sales and total assets. I measure a companys growth by the increase in log sales.

Profitability measures are return on assets and sales, with profit defined as EBITDA. I

use capital expenditures divided by net property, plant and equipment plus intangibles as

a measure of investment. Investment in intangibles is included in capital expenditures.

This is necessary since many firms do not report investments in fixed assets and

intangibles separately. Leverage is measured in two ways. First, I compute the ratio of

total liabilities over total liabilities plus equity. Liabilities are defined as the sum of total

debt, provisions and advances6. Also, I measure leverage as equity over total liabilities7.

6 Where applicable, I also add 50% of the Sonderposten mit Rcklageanteil to both equity and liabilities.

This balance sheet position includes reserves which reduce income for tax purposes only and which are

taxable when the reserves are dissolved as well as depreciation made for tax purposes in excess of those

admissible under the commercial code. It is standard practice to attribute 50% of this item to equity and

50% to liabilities. It is zero for 75% of the firm-years in my sample and accounts for less than 1% of total

liabilities on average.7

Using these two measures as well as coverage or the ratio of debt divided by debt plus equity yields

virtually identical results in sample statistics and regressions. Therefore, I report only the results using the

percentage of equity.


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I wish to include a measure of a firms research intensity, since R&D activity is

commonly interpreted as a good proxy for future growth opportunities. A major problem

in this context is that German firms are not required to publish R&D expenditures, and

none of my data sources provides this information consistently across firms. Therefore, I

approximate a firms research intensity by using data for US firms. I compute the ratio of

R&D divided by sales for all four-digit SIC sectors in the US, using data from

COMPUSTAT. I then match the German firm-years with the R&D ratio in their industry

in the US8. Obviously, this is a crude measure of research intensity. However, it appears

plausible that research intensity is strongly related within a given industry, and that

industries which require high R&D efforts in the US also require similar efforts in a

country with a comparable level of economic development. This method is roughly

similar to that used by Rajan and Zingales (1998), who use the external financing of an

industry in the US to approximate the need for external finance of that industry in other

countries.

Since market values of privately held firms are obviously not available, the market-to-

book ratio of a firm is measured as the median value of this ratio for the publicly traded

companies in the firms industry. The market-to-book ratio is commonly used as a proxy

for growth opportunities; a high market valuation relative to book value is interpreted asindicating that the market expects the firm to grow rapidly in the future. However, an

alternative interpretation is that a high market-to-book ratio may reflect temporary

mispricing; Ritter (1991) suggests that high market-to-book ratios in an industry induce

privately held firms in that industry to exploit the mispricing by going public. Both

explanations suggest a positive relation between the likelihood of going public and the

market-to-book ratio of the firms industry. However, there are two reasons why I am

careful in interpreting the results for market-book in my sample.

First, several industries are only sparsely represented on the German stock market

over portions of my sample period. This is especially problematic since the increase in

IPO activity which I am trying to explain comes largely from sectors such as information

technology where market data for very few firms is available prior to 1997. The

8 If at least five firm-years are available, I match according to 4-digit SIC codes; otherwise, I match with 3-


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commonly used method of aggregating firms across lower SIC code levels is impractical

for the data used here, since I would have to use 1-digit SIC codes to obtain a minimum

of five firms in several cases. I believe that this level of aggregation would leave almost

no information specific to a firms actual field of business, so that a different method of

combining industry sectors is chosen. Basically, related industries in fields where few

firms were publicly traded for parts of the sample period are grouped together without

strict adherence to the SIC system. For example, the information technology industry is

defined as manufacturing of computers and office machines (SIC 357), IT services (SIC

737) and telecommunications (parts of SIC 366, 481 and 482); see the list in the appendix

for details of other industry definitions.

A second point is that my database does not contain the information required to

distinguish between the two interpretations of the market-to-book ratio. Pagano, Panetta

and Zingales (1998) suggest that one can distinguish between these interpretations using

pre- and post-IPO data. If financing future growth opportunities is a major ex-ante

determinant of IPO probabilities, then the probability of equity carve-outs and spin-offs

should not be related to market-book, since these firms could already use the stock

market to raise funds for their expansion before the IPO. Unfortunately, my database

does not identify whether or not a firm is independent, so that I cannot construct thesubsample of dependent firms required to perform this test. Also, the short time period

since the start of trading on the New Market makes tests of ex-post characteristics of IPO

firms difficult. However, as more data about the behavior of firms after the IPO becomes

available for my sample, I will be able to test whether firms actually used the funds from

going public to invest in their growth opportunities. Alternatively, if the findings from

Italy in Pagano, Panetta and Zingales (1998) that there is no increase in investment after

an IPO9 holds, it would be difficult to argue that firms go public to finance future growth.

As long as no clean distinction between the competing interpretations is possible, I will

rely on a variety of variables to measure future growth prospects. The combined impact

of variables such as sales growth, capital expenditures, R&D intensity and market-to-

book should go far in capturing the effects of growth opportunities on the IPO process. I

or 2-digit codes.


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also experimented with an indicator for firms belonging to industries which are

forecasted to have substantial future growth by economic research institutes or securities

analysts to measure growth opportunities. However, the results from using this indicator

are highly sensitive to the industries defined as growth industries.

All of the variables discussed above are available for the sample of firms in the

Hoppenstedt database as well as for the full sample of IPO firms. The IPO prospectuses

provide additional information on a firms age and venture capital financing which is not

contained in the larger database. I define age using firm history information given in the

prospectuses. Using the date of legal incorporation is not informative in many cases, as

firms are required to have the legal status of an Aktiengesellschaft (common stock

company) before going public. If the firm has to change its legal form to an

Aktiengesellschaft, this entails a new entry into the commercial register, so that the date

of incorporation is often noted in the prospectus as the date of the change in legal form.

Since I am interested in the firm as an economic, not legal, entity, this information is not

useful for my purposes. Therefore, I search the IPO prospectuses for other evidence of

firm history. Many prospectuses contain a section on the historic development of the

company, or provide information on the evolution of the firm in the business activities,

company strategies or general information section of the prospectus. Where this is not thecase, I contact the firm directly.

Also, I use a dummy which is one if a firm was financed by venture capital firms and

zero otherwise in the regressions which explain the choice of exchange on which to go

public. To identify firms that received venture capital, I use the list of shareholders given

in most prospectuses as well as information in Deutsche Morgan Grenfell (1998).

C Summary statistics

Summary statistics for the data outlined above are contained in tables I to III. Table I

contains evidence that the creation of a market with features similar to those of the New

Market can substantially increase IPO activity. In the period from 1997 to 1999, several

European countries created new stock markets which all had the same basic principle that

9 In their full sample, there is even a significant long-term decrease in investment


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firms do not need to fulfill any substantial listing requirements as to minimum size, age

or profitability history, but that they are required to adhere to strict rules of information

disclosure. These exchanges (Amsterdam, Brussels, Frankfurt and Paris) form the core of

the EURO.NM network to which the Nuovo Mercato in Milan has recently been added.

The list NM in Helsinki, founded in 1999, adheres to a similar set of listing rules as the

EURO.NM markets and will therefore also be considered as part of the New Markets.

The other 32 countries considered in this part of the paper are the remaining members of

the Federation Internationale de Bourses de Valeur. My regressions will also contain

information on countries that introduced markets where listing requirements are less or

equally strict than on the established exchange, for example Ireland, South Korea or

Brazil.

The summary statistics in panel A of table I show that the introduction of new equity

markets with strict disclosure rules in six European countries has led to a significant

increase in the number of IPOs per million inhabitants. This number increased almost

fourfold after the New Markets were introduced (from 0.52 to 1.96), with a t-statistic for

the difference in means of 1.94. Next, I consider the countries that introduced New

Markets in 1996 or early 1997, namely Belgium, France, Germany and the Netherlands,

and compare the IPO activity in these countries with the rest of the world. Panel Bconsiders the difference in IPOs before and after 1997. The table shows that the number

of IPOs per 1,000 inhabitants did not significantly change in the countries that did not

introduce new markets; in fact, these countries experienced a slight decline from 3.25 to

2.56. In contrast, the number of IPOs increased dramatically in the four countries that

introduced New Markets: IPO activity after 1997 was almost fourfold that before 1997.

This result is highly significant, with a t-statistic of 3.13. Panel B also shows that before

1997, the non-EURO.NM countries had roughly eight times more IPOs per 1,000

inhabitants than the EURO.NM countries, whereas the difference had reduced to a

statistically insignificant amount in the period after 1997. However, we can see that the

amount of IPOs is still 50% higher in the non-EURO.NM countries.

Summary statistics for the firms contained in the Hoppenstedt database are in table II,

panel A. Univariate comparisons of means and medians of the firm-years in our database


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hint at significant differences between characteristics of firms choosing to stay private

versus going public as well as between firms going public on the New Market as opposed

to the established exchanges. Compared to the IPOs on the established exchange, firms

going public on the New Market are significantly smaller, have higher sales growth,

invest more and belong to more research-intense industries with higher market-to-book

ratios. There is no significant difference in leverage or in profitability between these two

groups, which stands in some contrast to the image of high-technology markets

predominantly attracting firms with strongly negative earnings. These summary statistics

give some support to the hypothesis that the introduction of the New Market resulted in a

substantial change in the characteristics of the firms going public. Compared to the full

sample of firms, the New Market IPOs are significantly smaller, grow faster, have a

higher return on assets, are less leveraged, invest more and belong to industries with

higher market-to-book and R&D/Sales ratios than the full sample of firms. The

established-market IPO firms are significantly larger, faster-growing, have a higher return

on assets, are less leveraged, invest more and belong to industries with higher R&D

intensity than the full sample of firms. There is no significant difference in market-to-

book ratios between these two groups of firms. Finally, the comparison of IPO firms

going public on the established exchanges shows that these IPOs are smaller on averageand have higher industry market-to-book ratios after 1997 than before.

More precise evidence for firm characteristics according to where they go public is

contained in table III, which gives data from the year preceding the IPO for the firms

going public between 1997 and 199910. The information in this table is much more

comprehensive for the set of IPO firms than table II, since the latter contains only data on

IPO firms present in the Hoppenstedt database after the adjustment for backfilled data

outlined above in this section , whereas table III has information on close to all firms

going public between 1997 and 1999. Table III shows that compared to firms going

public on the standard exchange, IPOs on the New Market are significantly smaller and

younger, grow faster, invest more and belong to industries with higher market-to-book

10 note that the numbers in tables II and III are not comparable. Table III summarizes data at one point in

time and uses data from all firms going public until 1999, whereas table II aggregates information over


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ratios and research intensity. They are also more likely to have received venture capital

funding. Median profitability is significantly higher for firms going public on the

established exchanges, whereas the difference in average profitability is not statistically

significant.

I do not consider the relatively small number of firms (14) that went public on

regional and unregulated exchanges. Introducing a separate category for these firms

would bunch together listings on different exchanges which vary substantially in terms of

listing and disclosure requirements. However, I perform all tests in this paper including

these firms as a separate category and find that the results are essentially unchanged.

The univariate results in tables II and III give some indication of the validity of the

hypothesis that the New Market has induced firms to go public to firms that did not do so

before, namely small, young firms from research-intense industries with large growth

potential. I will now show that this basic result also holds in a regression framework.

V Regression results

I provide empirical evidence on the change in the number and characteristics of IPO

firms after the introduction of new stock markets along three lines. First, I study the

change in the number of IPOs in a cross-section of 42 countries. Then, I analyze the

going public decision in one country, Germany, using the Hoppenstedt database. Finally,

taking the IPO decision as given, I study the determinants of the exchange on which firms

initially list.

In my opinion, this procedure is the best method of dealing with limitations imposed

by the availability of data. The international data is interesting since it allows me to study

the effect of introducing a New Market on the amount of IPOs across countries, a subset

of which chooses to introduce a New Market. Thus, these regressions will provide

evidence testing my first hypothesis on the effect of the New Market on the number of

IPOs.

time and uses data from IPOs that are contained in the Hoppenstedt database and that went public until

1999.


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I use separate regressions to analyze the determinants of the going public decision and

the choice of listing location. The Hoppenstedt database contains data going sufficiently

back in time to be included in the regressions for only 42 of the 245 firms that went

public after 1997. Since I use probit and multinomial logit models to find the significant

determinants of IPO probabilities and choice of exchange, it would not be possible to fill

in the data on the remaining IPO firms. Therefore, conditioning on the decision to go

public in my third set of regressions and separately analyzing the choice of exchange

using data on all firms in the IPO sample limits the loss of information caused by this

data problem. Also, this procedure allows me to use data on age and venture capital

financing from IPO prospectuses, which is not available for the full sample of firms, to

study the listing decision.

Table IV contains evidence that the creation of a market with features similar to those

of the New Market can substantially increase IPO activity. The dependent variable in this

regression, the change in the number of IPOs per one million inhabitants of a country, is

based on the one used in La Porta, Lopez-de-Silanes, Shleifer and Vishny (1997). I use

data on IPOs in all member countries of the FIBV from 1985 until 1999. The explanatory

variable of interest in regression (1) of table IV is a dummy which is one for the

EURO.NM countries and zero for all other countries. The regression results in table IVessentially confirm the intuition that establishing new equity markets with strict

disclosure requirements can significantly increase the IPO activity in a country. In

column 1, I report the results of a regression of the (log) number of IPOs per one million

inhabitants of a country on the log of the value of the stock market index as well as a

dummy variable which is one for the years in which countries had new equity markets

with strict disclosure standards. The value of the market index for each country is set to

one in 1994, one of the years for which data on all countries in the sample is available.

The regressions in table IV include year and country fixed effects (not reported). It is

apparent that there is a strong, significantly positive relationship between the number of

IPOs and the introduction of New Markets.

However, this result shows only correlation but says nothing about causation;

endogeneity is a major concern in the interpretation of the coefficients. Endogeneity is


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important since I am unable at this stage to distinguish between two explanations for the

larger number of IPOs in New Market countries: on the one side, it is possible that the

introduction of New Markets caused firms to go public that couldnt do so before due to

the mechanism outlined in the introduction. However, it is also possible that a large

number of young, high-tech firms ready to go public existed in Germany before 1997,

and that this caused the exchange to create the New Market. Since the direction of

causality is important for the interpretation of my results, finding valid instruments that

allow me to distinguish between the two interpretations will be a major challenge in

future revisions of this paper.

A first attempt at addressing the reverse causality issue is to distinguish between

countries that introduced exchanges with different levels of disclosure. It is likely that the

economic and technological factors leading to an increased demand by firms for a new

stock exchange, such as the exploding growth in the number of internet firms, are similar

in different countries11. Therefore, if the mere creation of an exchange requested by a

larger number of firms is the driving force behind the relation between IPO numbers and

New Markets, then introducing an exchange with low disclosure requirements should

also be strongly related the quantity of IPOs in a country.

As can be seen in regression 2 in table IV, the effect of high-disclosure New Marketsremains strongly positive and significant when a dummy variable for the country-years

where parallel stock markets were introduced which have lower or similar disclosure

requirements as the established markets is included. The coefficient on the latter variable

is positive but insignificant. The magnitude is also strongly different between New

Markets which have high and low disclosure requirements: the coefficient on the "high

disclosure" variable is more than five times that on the "low disclosure" variable.

Finally, the economic effect of New Markets with high disclosure standards is quite

strong. Substituting in the results for the regression coefficients, I find that introducing a

New Market results in a 3.4-fold increase in IPO activity, controlling for the effects of the

strong increases in stock market values of these countries in the time period after 1997 as

11

More satisfactory than this assumption would be an explicit empirical model of the factors that determine

the demand for the creation of a new market.


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well as for year and country fixed effects. Finally, as can be expected, there is a positive

relation between the level of stock market indices and IPO activity.

Tables V and VI investigate the change in the structure of IPO firms after the

introduction of the German New Market in greater detail. While table V focuses on the

characteristics of firms that decide to go public compared to those that stay private and

analyzes the choice of exchange only for the subset of IPO firms contained in the

Hoppenstedt database, table VI contains information on the type of firms that end up

going public on the different exchanges for nearly all IPOs between 1997 and 1999.

The results in table V show that the introduction of the New Market substantially

changes some of the IPO firms characteristics. While size had a significantly positive

effect before the introduction of the New Market, its effect becomes insignificant and

negative afterwards12. Sales growth is positively related to the IPO probability both

before and after the introduction of the New Market, and its magnitude is similar in both

time periods. The profitability variable is also significant and positive in both periods, but

its magnitude is far greater in the earlier period. The coefficients on the industry market-

to-book of a firm change across the periods: while there is no significant effect of the

industry market-to-book ratio before 1997, the coefficient on this variable is significantly

positive for the time after the New Market was introduced. Research intensity has astrong positive relation to the probability of going public both before and after the New

Market was created, and its magnitude is similar in both time periods. Finally, capital

expenditures have no effect on IPO probabilities before the New Market was introduced,

whereas this effect becomes positive after the introduction of the New Market; however,

none of these effects is statistically significant In general, we see that one variable which

is commonly used as an indicators of a firms growth potential, the market-to-book ratio,

changes signs and becomes a significant determinant of IPO probabilities after the

creation of the New Market.

However, using only time as a distinguishing characteristic has the substantial

drawback that all firms going public after 1997 are lumped into one group irrespective of

whether they list on the established exchange or the New Market, thus reducing the


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ability to separate out the economic effects of introducing the new exchange. This

problem is particularly relevant because a large percentage of the New Market firms

contained in the Hoppenstedt database drops out of the sample after eliminating

backfilled data, so that the final sample contains a disproportionately large fraction of

firms listing on the established exchanges.

One possibility to tackle this difficulty is to use multinomial logit regressions, as is

done in panel B. Here, I use the choice between staying private and going public either on

the established or the New Market as the three alternatives, focusing on the time period

after the introduction of the New Market. The comparison group used is the firms staying

private, since the full sample of IPO firms analyzed in table VI will provide much more

comprehensive tests distinguishing on which exchange firms choose to list. Therefore, I

focus first on the determinants of staying private as opposed to listing on each exchange

separately, and then analyze the choice of where to list conditional on the decision to go

public having been made in the next subsection of the paper. The results in table V, panel

B show that size, market-to-book and R&D intensity all have significantly positive

effects on the choice of going public on the established exchange as opposed to staying

private. Return on assets has a positive effect, but p-values between 0.043 and 0.083

indicate that the effect is only marginally significant. Sales growth and capitalexpenditures have no significant effect on the choice of listing on the established

exchange. The determinants of the choice between staying private and listing on the New

Market are quite different. Size has a strong negative effect on the choice of listing on the

New Market, and both sales growth and capital expenditures have significant positive

effects on the probability of listing on the new segment of the stock exchange. As in the

regressions analyzing the decision to list on the established exchange, market-to-book

and R&D intensity have a strong positive effect, but their magnitude increases

dramatically (almost fourfold for market-to-book, by over 50% for R&D intensity) when

I consider the choice of listing on the New Market. The regressions which focus on the

choice of exchange only will provide more insight into the significance of these

differences. As in the previous subsection, we see that the introduction of the New

12 Obviously, this does not mean that small firms are generally more likely to go public than large firms;


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Market results in a difference in the characteristics of firms going public. Compared to

the established exchange, the New Market appears to attract smaller firms, as well as

firms with large capital spending programs as well as sales growth. The next subsection

will analyze to what extent these differences as well as the differences in magnitude of

the market-to-book as well as R&D / Sales variables are statistically significant.

To give an illustrative example about the economic significance of these results,

consider the odds ratios for going public on either of the exchanges as opposed to staying

private for two firms A and B. Lets assume A is a large, profitable firm (both variables

at the top decile of the dataset) with average leverage and growth at the median level of

2%, and with low (meaning at the lowest decile) capital expenditures, market-to-book

ratio and R&D / Sales. In contrast, B is small and unprofitable (both at the lowest decile),

has average leverage and has high (i.e., at the top decile) sales growth, capital

expenditures, market-to-book and R&D / Sales. Given the results from the multinomial

logit model and noting that the log odds ratio for firm j of staying private versus going

public on exchange i is just iXj, I find that the relative probability of firm A going

public on the established exchange is 0.0042, whereas this probability is 0.0017 for firm

B. The relative probability of A going public on the New Market, on the other hand, is

0.000096, whereas it is 0.0145 for firm B. Thus, we can see that the coefficient estimatesimply a significant difference in the probability of various types of firms choosing

between the two exchanges.

A further way of gaining insight into the choice between staying private and going

public on either of the available exchanges is to interpret this decision as a choice

between the amount of information disclosure that a firm is willing to make. In this

context, staying private requires the lowest level of disclosure, going public on the

established exchange requires an intermediate level, whereas a listing on the New Market

demands the largest amount of information disclosure. This possibility of ranking the

available alternatives suggests using the ordered probit model13. The results from ordered

probit regressions, reported in panel C of table V, confirm the intuition from the previous

regressions: firms that have high values of variables that indicate growth potential,

rather, the sign of the coefficient reflects that the sample has a bias toward including large firms.


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namely capital expenditure, sales growth, industry market-to-book as well as R&D/Sales

are likely to choose the alternative requiring them to disclose higher amounts of

information. These results are robust to including market-to-book and R&D/Sales

separately as well as jointly. Size has no significant effect, which is in all likelihood

caused by the mixture of the positive effect of size on listing on the established exchange

and the negative effect of size on listing on the New Market.

Table VI gives further support to the hypothesis that different types of firms end up

going public on different exchanges. In these regressions, the dependent variable is one if

a firm goes public on the New Market and zero if it goes public on the established

market. All explanatory variables are measured in the year prior to the firms IPO. The

regressions include a venture capital dummy and age as additional explanatory variables;

these are not available for the firms in the Hoppenstedt database. In the first two columns,

either market-to-book or R&D intensity are omitted. The results of the two regressions

are quite similar. Small, young, fast-growing firms that are financed by venture capital

tend to go public on the New Market. Also, both market-to-book and R&D/Sales are

significantly positive when included separately. When both are included, the results on

the other variables remain essentially unchanged. However, the significance of both the

market-to-book and R&D/Sales coefficient drops compared to the regressions in the firsttwo columns, with p-values dropping to 0.065 and 0.071. Coupled with the observation

that the two variables have a raw correlation of 0.4233, this result indicates that to some

extent, the two variables proxy for similar effects. Given the overall results of the

regressions in table VI, I believe that it is safe to conclude that the firms going public on

the New Market are significantly different from those choosing the established market in

that they are smaller, younger and faster-growing, and that they belong to industries with

high growth opportunities. Given this result, the positive relation between venture capital

financing and the propensity to list on the New Market is not surprising, since venture

capitalists provide funding predominantly to small, young firms with large growth

opportunities.

13 Using ordered logit yields virtually identical results.


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The economic effects of these results are also significant. Measured at the median

values for all variables14, an increase in R&D intensity (market-to-book) by one standard

deviation increases the probability that a firm will list on the New Market from 70.7% to

84.0% (87.9%). An age increase by the same amount decreases the probability of listing

on the New Market to 44.7%, and an increase in log sales by one standard deviation

decreases this probability to 43.4%. The economic effect of sales growth is substantial as

well, as a one standard deviation increase in this variable raises the odds of listing on the

New Market to 88.7%. Finally, being financed by venture capital (which the median firm

is not) increases this probability from the initial 70.7% to 84.5%.

Similar to section III, I do not report regressions which include firms that go public on

the regional and unregulated exchanges, since these stock markets differ substantially

from each other. Some of the regional exchanges could be categorized as coming closer

to resembling either the New Market15 or the established exchanges, but an obvious

classification is not possible. On the other hand, the unregulated exchanges

(Freiverkehr) offer a far more lenient listing process, but the shares traded on these

markets are often highly illiquid. A multinomial logit specification that groups the 14

IPOs on regional and unregulated exchanges together shows only that IPOs on these

markets tend to be smaller than on the established exchanges; all other coefficients areinsignificant, even at the 10% level. In these regressions, the results from the comparison

of New Market and established exchanges remain qualitatively unchanged.

In summary, these results give further support to the hypothesis that establishing the

New Market allows a new type of firm to go public. Firms listing on the New Market are

significantly different from those going public on the established exchanges in terms of

age, size, future growth opportunities and inclination to use venture capital finance. This

supports the hypothesis that establishing the New Market with its strict information

disclosure rules created an opportunity for firms to raise equity capital that previously did

not have this opportunity.

14

I use medians since the data is highly skew.15

For example, the Prdikatsmarkt in Munich tries to attract similar firms as the New Market, but with less

stringent requirements.


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VI Conclusion

The previous sections presented evidence on the effectiveness of establishing a newstock exchange with strict disclosure requirements in increasing the number of firms that

go public and in giving firms access to equity finance that did not have this opportunity

before. It is particularly interesting that establishing new stock markets with strict

disclosure rules has significantly increased the number of IPOs in countries which are

traditionally classified as suffering from weak equity markets due to the dominance of

bank finance and the relatively low level of investor protection (compared to countries

with similar levels of per capita wealth) in these countries. The example of one country in

which these characteristics are particularly pronounced shows that the increase in IPOs is

driven by the fact that a new type of firms can get access to equity markets that was

unable to do so in the past. These firms are characterized by high levels of information

asymmetry. My empirical results establish that the problems in raising equity capital

associated with information asymmetries can be overcome if an opportunity exists to

credibly pre-commit to an open policy of information disclosure. Such an opportunity

was created by the establishment of the New Market in Germany, since it requires the

precommitment to strict disclosure rules before listing and enforces these rules by the

credible threat of delisting, making failure to adhere to them costly. This point illustrates

why small, young high-tech firms went public in large numbers only after the

introduction of the New Market, even though no outside force prevented them from doing

so before.

The observation that an institutional reform such as the introduction of a new equity

market significantly increases IPO activity in countries which previously relied only

sparsely on equity finance and that such a reform is able to change the nature of firms

going public also points to further questions in the context of the literature on finance and

growth. The observation that bank-oriented countries with low levels of investor

protection can increase their IPO activity to levels similar to that of market-oriented

countries with high levels of investor protection by introducing equity markets with strict

information disclosure rules points to the importance of considering other factors than the


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economic system or the legal environment in explaining the relative importance of equity

markets in different economies.

Some questions are left open for future research. A first topic is to develop a formal

model for the ideas outlined in the introductory section. On the empirical side, an

interesting question is why German firms did not escape the restrictions of the domestic

equity markets before 1997 by listing abroad, as a large number of Israeli companies did

by going public on NASDAQ (see Blass and Yafeh (1999)). Also, it would be interesting

to extend the more detailed analysis of changes in firm characteristics after the

introduction of New Markets to other countries. This would allow a better answer to the

question if the empirical results of this paper are indeed regularities, or if they are due to

factors specific to Germany, such as the liberalization of the telecommunications

industry. Moreover, as new data arrives over time it will be interesting to study the post-

IPO characteristics of firms that went public on the New Market in order to better

evaluate the economic effects of the improved access to equity finance, and to be better

able to interpret the results on the market-to-book variable. A related topic is to devise

tests that allow a better distinction between the effects of market timing and growth

opportunities; perhaps using a combination of risk-adjusted industry returns to measure

market timing and R&D intensity to measure growth options can shed some light on thisissue. Furthermore, it seems interesting to look further into the generally positive relation

between R&D intensity and propensity to go public. Finally, future research could

address the question if the opening of a profitable exit strategy for venture capital leads to

substantial growth of this form of financing. Perhaps an important contribution of the

New Markets will be to make venture capital investments profitable enough attract

significant inflows of new capital, which could in turn lead to sustainable growth

prospects for IPO markets that appeared hopelessly stagnant only a few years ago.

Of course, only the future can tell if the New Market phenomenon will persist and

significantly transform the economies of Continental Europe towards a stronger use of

equity finance. It is not possible to rule out at this point that the effect we are observing is

only a outburst of IPO activity that will die off as soon as an overhang of firms in most

dire need of equity capital has gone public, or as soon as an extended market downturn


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hits. However, the evidence presented here shows that such a transformation is driven by

strong economic forces, and that it may be able to help overcome the traditional

dichotomy of bank- vs. market-based economic systems.


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Table I: Summary statistics, Cross-country data

Summary statistics for data on the number of IPOs in 42 countries. In panel A, the countries introducing New

Markets are Belgium, Finland, France, Germany, Italy and the Netherlands. The countries introducing these markets in

either 1996 or 1997 in panel B are Belgium, France, Germany, and the Netherlands. New Markets are defined as newly

founded equity markets with higher standards of disclosure than is required on the established exchanges. Data on thenumber of IPOs ranges from 1985 to 1999 and is from the Federation Internationale de Bourses de Valeur as well asfrom individual exchanges.

Panel A: Effects of New Markets on the number of IPOs in a countryBefore introduction of

the New Market

After introduction of

the New Market

t-statistic for the

difference in means

Average IPOs/ 1m

population

0.52 1.96

Observations 6 6

-1.94

Panel B: Number of IPOs before and after the creation of New Markets in fourcountries in 1996 or 1997

New Market countries Other countries t-statistic for the

difference in means

Average IPOs/ 1m

population, before 1997

(Observations)

0.42

(4)

3.25

(36) -1.87

Average IPOs/ 1m

population, after 1997

(Observations)

1.62

(4)

2.56

(38) -1.58

t-statistic for the

difference in means

-3.13 0.51


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Table II: Summary statistics, all firms

This table contains summary statistics for the non-financial firms in the Hoppenstedt database between 1993 and 1998.

Sales growth is defined as the increase of log sales. Return on assets (sales) is EBITDA divided by total assets (sales).

Leverage is total liabilities over total assets; equity is the percentage of equity in total assets. Market-to-book is the market

value of equity plus the book value of liabilities divided by book assets; it is measured as the median value in a firmsindustry. Capex is capital expenditure divided by net property, plant and equipment. Industry R&D / Sales is calculated using

data on traded firms in the U.S. obtained from COMPUSTAT. Industries are defined according to SIC classifications.

Panel B gives the results from tests for the significance of the results in panel A. Tests for the significance of the

difference between means are performed using a standard t-test; the tests for the significance of differences between mediansuse the Wilcoxon signed-rank test.

Panel A: Summary statistics, Hoppenstedt database

Obs. Mean Median Std. Dev. Min. Max.

Total Assets (Mio. DM)

All firms IPOs 93-96 IPOs 97-99, new mkt. IPOs 97-99, establ.

15,683

330

4892

688.0

3,560.4

114.5816.9

129.4

278.0

5.0268.4

4,639.1

21,670.2

151.61,336.9

0.02

3.6

8.012.0

284,790.0

174,325.0

897.0677.9

Sales (Mio. DM)


15,683

330

48

92

686.2

1,996.9

141.0

1,084.2

131.4

337.3

8.7

377.2

3,020.3

8,618.0

216.8

2,297.6

0.00

0.5

13.2

18.4

105,784.0

69,861.0

1,470.0

19,551.3

Sales growth


12,301

271

39

79

0.003

0.10

0.34

0.08

0.03

0.10

0.22

0.08

0.39

0.33

0.43

0.24

-2.35

-1.69

-0.63

-1.52

1.36

1.36

1.36

0.73

Return on assets All firms IPOs 93-96 IPOs 97-98, new mkt. IPOs 97-98, establ.

14,918

324

47

92

0.12

0.15

0.19

0.15

0.10

0.15

0.16

0.14

0.13

0.10

0.14

0.10

-0.31

-0.31

0.04

-0.25

0.60

0.55

0.60

0.38

Return on sales


14,918

324

47

92

0.14

0.14

0.15

0.12

0.10

0.11

0.15

0.11

0.23

0.16

0.10

0.13

-0.70

-0.69

0.04

-0.16

1.18

1.18

0.58

1.06


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Equity


15,678

330

48

92

0.28

0.37

0.37

0.37

0.25

0.35

0.31

0.36

0.19

0.17

0.21

0.17

0.00

0.00

-0.05

0.04

0.89

0.89

0.84

0.78Industry Market-Book


15,683

330

48

92

1.40

1.39

2.17

1.51

1.31

1.28

1.41

1.33

0.36

0.48

1.43

0.54

0.94

0.94

1.16

1.06

5.63

5.63

5.63

5.63

Capex


15,395

329

48

92

0.24

0.29

0.53

0.30

0.17

0.24

0.52

0.21

0.26

0.22

0.37

0.26

0.00

0.00

0.00

0.00

1.33

1.33

1.25

1.33

Industry R&D / Sales


15,270307

48

82

0.010.03

0.05

0.04

0.00050.01

0.04

0.01

0.030.04

0.05

0.05

0.000.00

0.00

0.00

0.610.17

0.18

0.18

Panel B: Tests for significance of differences between means and medians

IPOs on established vs. New Market, 1997-99 All firms vs. established-market IPOs,

1997-99

Mean Median Mean Median

Total Assets *** *** ** ***

Sales *** *** *** ***

Sales growth *** *** *** ***

Return on assets * *** ***

Return on sales * ***

Equity *** ***

Industry Market-Book *** ***

Capex *** *** *** ***

Industry R&D / Sales *** *** *** ***

All firms vs. New Market IPOs, 1997-99 IPOs 1993-96 vs. IPOs 1997-99,

established exchanges only

Mean Median Mean Median

Total Assets *** *** ** **

Sales *** ***Sales growth *** ***

Return on assets *** *** *** ***

Return on sales ** *

Equity *** ***

Industry Market-Book *** *** ** ***

Capex *** ***

Industry R&D / Sales *** ***

results are significant at the *** 1% level ** 5% level * 10% level


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Table III : Summary statistics, IPO firms 1997 - 1999This table contains summary statistics for the non-financial firms that went public between 1997 and the end of

1999. All numbers refer to the year prior to the Initial Public Offering of the firms in the sample. The difference

between the total number of IPOs and the sum of the number of IPOs on the New Market and the established market is

due to listings on regional and unregulated exchanges.

Sales growth is defined as the increase of log sales. Return on assets (sales) is EBITDA divided by total assets(sales). Leverage is total liabilities over total assets; equity is the percentage of equity in total assets. Market-to-book is

the market value of equity plus the book value of liabilities divided by book assets; it is measured as the median value

in a firms industry. Capex is capital expenditure divided by net property, plant and equipment. Industry R&D / Sales is

ca

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