Article2007

The long‐run performance of initial public offerings in Germany

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Corporate Finance and Governance Financial Markets and Investment Strategies Financial Analysis and Corporate Governance

Abstract

Purpose The objective of this study is to investigate the long‐run performance of initial public offerings (IPOs) in Germany for the period from 1977 to 1995. The paper studies why some IPO firms have substantial positive and others have substantial negative long‐run buy‐and‐hold abnormal returns. Design/methodology/approach The paper approaches this problem by differentiating the abnormal return patterns by the following criteria: benchmark, year of going public, security design, money raised, market value and magnitude of underpricing. Findings The empirical findings suggest that the subsequent financing activity in the equity market is the most important factor for determining the future performance of an IPO. This variable separates the out‐performers from the under‐performers. Thus, only successful firms have the opportunity to raise additional funds in the equity market through a seasoned equity offering. Research limitations/implications Future research should concentrate on investigating whether the introduction of new stock market segments in Germany has changed the long‐run performance of IPOs. Practical implications The results suggest that firms with a superior performance have the opportunity to raise additional equity whereas the poor performers do not get a second chance to sell equity to the public. This means that firms have to earn at least their cost of capital in order to receive additional funding. Originality/value Compared to other research, this study explains the significant difference in long‐run performance between two groups of IPOs based on the future financing decision. This finding offers new insights to both academics and practitioners alike.

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References

1984Corporate financing and investment decisions when firms have information that investors do not have 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1996Agency costs of free cash flow, corporate finance, and takeovers 1996Multifactor Explanations of Asset Pricing Anomalies 1984Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have 2002Investor Protection and Corporate Valuation 1995The New Issues Puzzle 1991The Long‐Run Performance of initial Public Offerings

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