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 Str mberg 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 pjkukies@gsbphd.uchicago.edu.

Abstract
This 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

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 a possible 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

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).

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 asymmetric information 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

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 side of 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

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 exchanges 1 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 long1

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

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 that wish 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

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 Brse 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.

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

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

German firms are not required to file statements of cash flows

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 null hypothesis 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 public offering 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 advances 6 . Also, I measure leverage as equity over total liabilities 7 .

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 US 8 . 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-tobook 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 as indicating 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 the subsample 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 IPO 9 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-tobook 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 the case, 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 B considers 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-tobook 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 average and 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 1999 10 . 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

17

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.

18

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 IV essentially 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

19

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 countries 11 . 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 Markets remains 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.

20

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 afterwards 12 . 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 marketto-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 a strong 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

21

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 capital expenditures 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;

22

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 estimates imply 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.

23

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 first two 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 variables 14 , 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 Market 15 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 are insignificant, 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 15

I use medians since the data is highly skew. 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 new stock 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

26

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 postIPO 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 this issue. 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

27

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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Edwards, J. and K. Fischer (1994), Banks, finance and investment in Germany, Cambridge University Press, Cambridge Ellingsen, T. and Rydqvist, K. (1997), The Stock market as a screening device and the decision to go public, Working paper 174, Stockholm School of Economics Foucault, T. and C. Parlour (1999), Competition for Listings, mimeo, HEC, Jouy en Josas Gompers, P. (1996), Grandstanding in the venture capital industry, Journal of Financial Economics 42, 133-156 Harris, M. and R. Raviv (1991), The theory of capital structure, Journal of Finance 46, 297-355 LaPorta, R., F. Lopez-de-Silanes, A. Shleifer and R. Vishny (1997), Legal determinants of external finance, Journal of Finance 52, 1131-1150 Leland, H. and D. Pyle (1977), Information asymmetries, financial structure and financial intermediation, Journal of Finance 32, 737-748 Lerner, J. (1994), Venture capitalists and the decision to go public, Journal of Financial Economics 35, 293-316 Myers, S. (1977), Determinants of corporate borrowing, Journal of Financial Economics, 146-174 Myers, S. and Majluf, N. (1984), Corporate financing and investment decisions when firms have information that investors do not have, Journal of Financial Economics 13, 187-221 Pagano, M. (1993), The flotation of companies on the stock market: A coordination failure model, European Economic Review, 37, 1101-1125 Pagano, M., F. Panetta and L. Zingales (1998), Why do companies go public? An empirical analysis, Journal of Finance, 53, 27-64 Pagano, M. and Roell, A. (1998), The choice of stock ownership structure: agency costs, monitoring and the decision to go public, The Quarterly Journal of Economics, 187225 Rajan, R. (1992), Insiders and outsiders: The choice between informed and arms length debt, Journal of Finance 47, 1367-1423 Rajan, R. and L. Zingales (1995), What do we know about capital structure? Some evidence from international data, Journal of Finance, 50, 1421-1460

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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 the number of IPOs ranges from 1985 to 1999 and is from the Federation Internationale de Bourses de Valeur as well as from individual exchanges.

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

Average IPOs/ 1m population Observations Before introduction of the New Market 0.52 6 After introduction of the New Market 1.96 6 t-statistic for the difference in means -1.94

Panel B: Number of IPOs before and after the creation of New Markets in four countries in 1996 or 1997
New Market countries Average IPOs/ 1m population, before 1997 (Observations) Average IPOs/ 1m population, after 1997 (Observations) t-statistic for the difference in means 0.42 (4) 1.62 (4) -3.13 Other countries 3.25 (36) 2.56 (38) 0.51 t-statistic for the difference in means -1.87

-1.58

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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 firms industry. 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 medians use the Wilcoxon signed-rank test.

Panel A: Summary statistics, Hoppenstedt database

Obs. Total Assets (Mio. DM) All firms IPOs 93-96 IPOs 97-99, new mkt. IPOs 97-99, establ. Sales (Mio. DM) All firms IPOs 93-96 IPOs 97-98, new mkt. IPOs 97-98, establ. Sales growth All firms IPOs 93-96 IPOs 97-98, new mkt. IPOs 97-98, establ. Return on assets All firms IPOs 93-96 IPOs 97-98, new mkt. IPOs 97-98, establ. Return on sales All firms IPOs 93-96 IPOs 97-98, new mkt. IPOs 97-98, establ. 15,683 330 48 92 15,683 330 48 92 12,301 271 39 79 14,918 324 47 92 14,918 324 47 92 Mean 688.0 3,560.4 114.5 816.9 686.2 1,996.9 141.0 1,084.2 0.003 0.10 0.34 0.08 0.12 0.15 0.19 0.15 0.14 0.14 0.15 0.12 Median 129.4 278.0 5.0 268.4 131.4 337.3 8.7 377.2 0.03 0.10 0.22 0.08 0.10 0.15 0.16 0.14 0.10 0.11 0.15 0.11 Std. Dev. 4,639.1 21,670.2 151.6 1,336.9 3,020.3 8,618.0 216.8 2,297.6 0.39 0.33 0.43 0.24 0.13 0.10 0.14 0.10 0.23 0.16 0.10 0.13 Min. 0.02 3.6 8.0 12.0 0.00 0.5 13.2 18.4 -2.35 -1.69 -0.63 -1.52 -0.31 -0.31 0.04 -0.25 -0.70 -0.69 0.04 -0.16 Max. 284,790.0 174,325.0 897.0 677.9 105,784.0 69,861.0 1,470.0 19,551.3 1.36 1.36 1.36 0.73 0.60 0.55 0.60 0.38 1.18 1.18 0.58 1.06

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Equity All firms IPOs 93-96 IPOs 97-98, new mkt. IPOs 97-98, establ. Industry Market-Book All firms IPOs 93-96 IPOs 97-98, new mkt. IPOs 97-98, establ. Capex All firms IPOs 93-96 IPOs 97-98, new mkt. IPOs 97-98, establ. Industry R&D / Sales All firms IPOs 93-96 IPOs 97-98, new mkt. IPOs 97-98, establ.

15,678 330 48 92 15,683 330 48 92 15,395 329 48 92 15,270 307 48 82

0.28 0.37 0.37 0.37 1.40 1.39 2.17 1.51 0.24 0.29 0.53 0.30 0.01 0.03 0.05 0.04

0.25 0.35 0.31 0.36 1.31 1.28 1.41 1.33 0.17 0.24 0.52 0.21 0.0005 0.01 0.04 0.01

0.19 0.17 0.21 0.17 0.36 0.48 1.43 0.54 0.26 0.22 0.37 0.26 0.03 0.04 0.05 0.05

0.00 0.00 -0.05 0.04 0.94 0.94 1.16 1.06 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.89 0.89 0.84 0.78 5.63 5.63 5.63 5.63 1.33 1.33 1.25 1.33 0.61 0.17 0.18 0.18

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

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

IPOs 1993-96 vs. IPOs 1997-99, established exchanges only Mean Median ** **

***

*** * ***

**

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Table III : Summary statistics, IPO firms 1997 - 1999

This 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 calculated using data on traded firms in the U.S. obtained from COMPUSTAT. Industries are defined according to SIC classifications. The variable Venture capital is one if a firm received financing from a venture capitalist prior to the IPO. Age is defined as the time since a firm was founded as an economic unit, which neednt correspond to its legal incorporation. Results from tests for the significance of the difference between means are performed using a standard ttest; the tests for the significance of differences between medians use the Wilcoxon signed-rank test.

Obs. Total Assets (Mio. DM) All IPOs New Market Established mkt. Significance of diff. Sales (Mio. DM) All IPOs New Market Established mkt. Significance of diff. Sales growth All IPOs New Market Established mkt. Significance of diff. Return on assets All IPOs New Market Established mkt. Significance of diff. Return on sales All IPOs New Market Established mkt. Significance of diff. Equity All IPOs New Market Established mkt. Significance of diff. Coverage All IPOs New Market Established mkt. Significance of diff. 203 139 50

Mean 174.1 59.6 534.1 ** 217.4 81.3 658.2 *** 0.45 0.58 0.11 *** 0.16 0.15 0.19

Median 32.1 24.7 138.0 *** 47.6 36.1 184.8 *** 0.24 0.37 0.13 *** 0.15 0.13 0.17 *** 0.10 0.09 0.27 ** 0.21 0.19 0.27

Std. Dev. 716.5 124.9 1,377.0

Min. 0.04 0.04 1.7

Max. 7,870.8 1,058.9 7,870.8

201 138 49

769.9 178.5 1,454.3

0 0 3.0

8,527.7 1,674.0 8,527.7

191 131 48

0.79 0.90 0.26

-1.36 -0.23 -1.36

4.79 4.79 0.62

184 122 48

0.30 0.33 0.16

-2.20 -2.20 -0.37

2.00 2.00 0.84

183 121 48

-0.04 -0.05 0.09

0.95 0.96 0.21

-7.25 -7.25 -1.27

0.71 0.57 0.30

195 138 49

0.24 0.22 0.26

0.28 0.29 0.27

-1.29 -1.29 -1.00

0.95 0.95 0.88

184 122 48

29.40 35.35 15.31 ***

8.38 8.56 8.03

38.43 42.96 17.47

0 0 0

100 100 78.91

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Industry mkt-book All IPOs New Market Established mkt. Significance of diff. Capex All IPOs New Market Established mkt. Significance of diff. Age All IPOs New Market Established mkt. Significance of diff. Venture capital All IPOs New Market Established mkt. Significance of diff.

207 141 52

2.53 2.94 1.55 *** 1.12 1.39 0.41 ** 22.13 12.32 49.58 ***

1.75 2.58 1.32 *** 0.53 0.62 0.23 *** 10.5 9 32 ***

1.68 1.79 0.69

1.06 1.09 1.06

5.63 5.63 5.63

188 127 49

3.93 4.71 0.54

0.003 0.003 0.004

36.44 36.44 3.04

204 138 52

31.15 12.51 45.46

1 1 1

159 87 159

207 141 52

0.31 0.37 0.23 **

0 0 0

0.47 0.48 .44

0 0 0

1 1 1

Industry R&D / Sales All IPOs 197 0.05 0.03 134 0.06 0.04 New Market 50 0.03 0.01 Established mkt. *** Significance of diff. differences are significant at the *** 1% level ** 5% level * 10% level

0.05 0.06 0.04

0 0 0

0.18 0.18 0.13

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Table IV: Regression results, international sample

Results from fixed effects regressions explaining the (log) number of IPOs per one million inhabitants of a country. Market index is the natural log of a countrys market index, where the index is set to one in each country for 1994. New Market (high disclosure) is a dummy variable which is one if a country creates a new equity market with higher disclosure requirements than the standard exchange. New Market (low disclosure) is a dummy variable which is one if a country creates a new equity market with equal or lower disclosure requirements than the standard exchange. Standard errors used to compute the p-values in parentheses are heteroskedasticity-robust. Dummies for year and country fixed effects are included but not reported.

Dependent variable: IPOs/ 1m population Market index (value in 1994 = 1 for each country) New Market (high disclosure) New Market (low disclosure) Observations R-squared

(1) 0.44 (0.000) 1.17 (0.000)

(2) 0.43 (0.000) 1.21 (0.000) 0.23 (0.373) 436 0.73

436 0.73

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Table V: Regression results, IPO decision

Results from probit regressions. The dependent variable is one in the year of a firms IPO and zero otherwise. All independent variables are lagged by one year. Sales growth is the increase of log sales. Capex is capital expenditure over net property, plant and equipment. Return on assets is EBITDA divided by 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. 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 The New Market dummy is one for the years 1997 and 1998. The regressions are estimated with heteroskedasticity-consistent standard errors; p-values are given in parentheses. Standard errors in the pooled regression are adjusted for clustering on firms. Calendar year dummies are included in the regressions but are not reported.

Panel A: Determinants of the IPO choice before and after the introduction of the New Market
1995 - 1996 Log sales Sales growth Capex Return on assets Equity Market-to-book R&D / Sales Observations Pseudo R2 5,001 0.141 0.194 (0.000) 0.696 (0.000) -0.426 (0.261) 2.237 (0.000) 0.342 (0.472) -0.124 (0.787) 0.193 (0.001) 0.645 (0.000) -0.659 (0.110) 2.535 (0.000) 0.327 (0.540) 0.180 (0.002) 0.676 (0.000) -0.627 (0.165) 2.682 (0.000) 0.345 (0.515) -1.287 (0.231) 5.280 (0.000) 4,889 0.205 -0.020 (0.613) 0.565 (0.005) 0.315 (0.144) 0.830 (0.014) 0.036 (0.913) 0.294 (0.001) 1997 - 1999 -0.052 (0.243) 0.608 (0.003) 0.348 (0.098) 0.822 (0.015) -0.096 (0.782) -0.041 (0.332) 0.570 (0.007) 0.258 (0.255) 0.735 (0.034) -0.038 (0.914) 0.281 (0.001) 4.365 (0.008) 6,213 0.110

5.363 (0.000) 4,890 0.180

6,375 0.092

5.258 (0.001) 6,217 0.088

38

Panel B: Multinomial logit model of the choice between staying private and listing on the established or New Market. Comparison group: firms staying private.
IPOs on the established market

Log sales
Sales growth Capex Return on assets Equity Market-to-book R&D / Sales
IPOs on the New Market

.328 (0.019) .701 (0.507) -.587 (0.601) 3.060 (0.053) 1.253 (0.361) .540 (0.048)

.304 (0.039) .650 (0.555) -.765 (0.532) 3.218 (0.043) 1.149 (0.410)

.300 (0.043) .539 (0.628) -.921 (0.453) 2.831 (0.083) 1.090 (0.438) .540 (0.070) 10.255 (0.095)

11.738 (0.046)

Log sales
Sales growth Capex Return on assets Equity Market-to-book R&D / Sales Observations Pseudo R2

-.402 (0.043) 1.818 (0.033) 2.050 (0.007) 1.431 (0.448) -1.252 (0.458) 2.121 (0.014)

-.510 (0.011) 1.916 (0.029) 2.315 (0.002) 1.910 (0.289) -1.688 (0.322)

-.497 (0.015) 1.888 (0.033) 1.946 (0.015) 1.046 (0.577) -1.460 (0.388) 1.970 (0.026) 17.087 (0.008) 6,206 0.157

6,368 0.135

18.156 (0.003) 6,210 0.138

Panel C: Ordered probit model of the choice between staying private and listing on the established or New Market.

Log sales
Sales growth Capex Return on assets Equity Market-to-book R&D / Sales Observations Pseudo R2

.023 (0.600) .528 (0.041) .444 (0.046) .926 (0.048) .173 (0.650) .238 (0.009)

-.0004 (0.992) .540 (0.041) .440 (0.055) .920 (0.051) .060 (0.876)

.003 (0.949) .528 (0.047) .392 (0.093) .820 (0.087) .093 (0.812) .215 (0.031) 4.627 (0.010) 6,206 0.097

6,368 0.078

5.266 (0.002) 6,210 0.086

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Table VI: Regression results, Listing decision

Results from probit regressions. The dependent variable is the exchange on which an IPO firm lists. The exchange variable is one if the firm lists on the New Market and zero if it lists on the established market. All independent variables are measured in the year preceding the IPO. Sales growth is the increase of log sales. Capex is capital expenditures divided by net property, plant and equipment. Return on assets is EBITDA divided by 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. The venture capital dummy is one if an IPO firm received venture capital financing at any time before going public. 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. The regressions are estimated with heteroskedasticity-consistent standard errors; p-values are given in parentheses. Calendar year dummies are included in the regressions but are not reported. Log sales Sales growth Capex Return on assets Equity Venture capital Age Market-to-book Industry R&D / Sales Observations Pseudo R2 167 0.497 -0.403 (0.003) 1.231 (0.042) 0.061 (0.430) -0.774 (0.445) 0.826 (0.279) 0.722 (0.007) -0.020 (0.000) 0.412 (0.013) -0.385 (0.004) 1.052 (0.078) 0.089 (0.800) -0.640 (0.551) 0.672 (0.355) 0.608 (0.035) -0.023 (0.000) -0.388 (0.006) 1.201 (0.066) 0.028 (0.817) -0.561 (0.595) 0.756 (0.272) 0.694 (0.013) -0.022 (0.001) 0.367 (0.065) 8.434 (0.071) 164 0.521

10.502 (0.019) 164 0.498

40

Appendix A: Industry definitions used in market-to-book calculations

Industry
Natural resources Construction Food & tobacco Beverages Textile products & leather Clothing Lumber & paper Furniture Print, media & entertainment Chemicals & petroleum Rubber Gals, cement, porcelain & other construction materials Steel Other metal treatment Metal products General machinery & engines Tool machines Construction & other industry-specific machines Computers, other office machines, IT services & telecoms Electronics general Conductors & lighting Transport manufacturing Measurement & controls Other manufacturing industries Transport services Utilities Distributors durables Distributors non-durables Retailers Real estate Services

SIC codes
0 1499 1500 1799 2000 2079, 2090 2099, 2100 2199 2080 2089 2200 2299, 3100 3199 2300 2399 2400 2499, 2600 2699 2500 2599 2700 2799, 4830 4849, 7800 7999 2800 2999 3000 3099 3200 3299 3310 3329 3300, 3320 - 3399 3400 - 3499 3500, 3510 3519 3540 3549 3520 3539, 3550 3569, 3580 3599 3570 3579, 3660 3669, 4812, 4813, 4822, 4899, 7370 7379 3600 3639, 3650 3659, 3670 3679, 3690 - 3699 3640 3649 3700 3799 3800 3899 3900 3999 4000 4799 4900 4999 5000 5099 5100 5199 5200 5999 6500 6599 7000 9699

41