This paper analyzes a comprehensive data set of 108 non venture-backed, 58 venture-backed and 33 bridge financed companies going public at Germany's Neuer Markt between March 1997 and March 2000. I examine whether these three types of issues differ with regard to issuer characteristics, balance sheet data or offering characteristics. Moreover, this empirical study contributes to the underpricing literature by focusing on the complementary or rather competing role of venture capitalists and underwriters in certifying the quality of a company when going public. Companies backed by a prestigious venture capitalist and/or underwritten by a top bank are expected to show less underpricing at the initial public offering (IPO) due to a reduced ex-ante uncertainty. T his study provides evidence to the contrary: VC-backed IPOs appear to be more underpriced than non VCbacked IPOs.

Abstract:We present a survey on the role of initial public offerings (IPOs) and venture capital (VC) in Germany after the Second World War. Between 1945 and1983 IPOs hardly played a role at all and only a minor role thereafter. In addition, companies that chose an IPO were much older and larger than the average companies going public for the first time in the US or the UK. The level of IPO underpricing in Germany, in contrast, has not been fundamentally different from that in other countries. The picture for venture capital financing is not much different from that provided by IPOs in Germany. For a long time venture capital financing was hardly significant, particularly as a source of early stage financing. The unprecedented boom on the Neuer Markt between 1997 and 2000, when many small venture capital financed firms entered the market, provides a striking contrast to the preceding era. However, by US standards, the levels of both IPO and venture capital activities remained rather low even in this boom phase. The extent to which recent developments will have a lasting impact on the financing of German firms, the level of IPO activity, and venture capital financing, remains to be seen. At the time of writing, activity has come to a near stand still and the Neuer Markt has just been dissolved. The low number of IPOs and the fairly low volume of VC financing in Germany before the introduction of the Neuer Markt are a striking and much debated phenomenon. Understanding the reasons for these apparent peculiarities is vital to understanding the German financial system. The potential explanations that have been put forward range from differences in mentality to legal and institutional impediments and the availability of alternative sources of financing. Moreover the recent literature discusses how interest groups may have benefited and influenced the situation. These groups include politicians, unions/ workers, managers/controlling-owners of established firms as well as banks.JEL Classification: G10, G24, G14

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Abstract:Over-allotment arrangements are nowadays part of almost any initial public offering. The underwriting banks borrow stocks from the previous shareholders to issue more than the initially announced number of shares. This is combined with the option to cover this short position at the issue price. We present empirical evidence on the value of these arrangements to the underwriters of initial public offerings on the Neuer Markt. The over-allotment arrangement is regarded as a portfolio of a long call option and a short position in a forward contract on the stock, which is different from other approaches presented in the literature.Given the economically substantial values for these option-like claims we try to identify benefits to previous shareholders or new investors when the company is using this instrument in the process of going public. Although we carefully control for potential endoge neity problems, we find virtually no evidence for a reduction in underpricing for firms using over-allotment arrangements. Furthermore, we do not find evidence for more pronounced price stabilization activities or better aftermarket performance for firms granting an over-allotment arrangement to the underwriting banks. EFM Classification: 230, 410Keywords: Over-Allotment Option, Flotation Costs, Underwriter Fee, Neuer Markt * Center for Financial Studies, Taunusanlage 6, 60329 Frankfurt am Main, Germany. Phone: +49-69-242 941 16, Fax: +49-69-242 941 77, Email: franzke@ifk -cfs.de ♣ Faculty of Economics and Business Administration, Goethe University, Mertonstr. 17, 60054 Frankfurt am Main, Germany. Phone: +49-69-798-22674, Fax: +49-69-798-22788, Email: schlag@wiwi.uni-frankfurt Introduction and MotivationSince the mid nineties book building has increasingly replaced the fixed-price method as the standard procedure for setting the issue price in initial public offerings (IPOs) in Germany. Along with this change the instrument of the over-allotment option (also called "greenshoe" option 1 ) has gained considerable importance. An over-allotment arrangement (OAA) typically works as follows. To be able to meet potentially higher demand for an issue, i.e. to be able to place more than the initially announced number of shares, the underwriter borrows additional shares (the greenshoe (GS)) 2 from the company going public. This borrowing of the shares comes with the obligation for the underwriter to return the shares within a fixed period of time, usually one month. In case of a bullish market the underwriter might thus be forced to buy back the shares at a higher price, thereby incurring a loss. An OAA, including a GS option, however, allows the underwriting bank to buy the shares from the issuing firm at the issue price, and this agreement protects the underwriter against unfavorable price movements in the secondary market. On the other hand, a trading profit for the underwriting bank could arise if the stock trades below the issuing price sometime during the life of the OAA, since the underwriter could then buy the sha...

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