too rigid and not suited to small corporations.48 A case in point is, for example, codetermination
and the dual board structure. But this argument cannot explain the low number of IPOs of large
corporations. The Mitbestimmungsgesetz (Codetermination Law) of 1976 also applies to GmbHs
with more than 2000 employees so that large GmbHs are also subject to codetermination and also
have to implement a dual board structure.
To the extent that legal impediments reduce the use of the stock market as a source of
financing and therefore also reduce the availability of venture capital, the question arises why this
situation has not been changed earlier. One possible reason is that there was no need for change
because alternative sources of financing (and investment) were available.
Alternative Sources of Financing. Arguably long-term close relationships between banks and
firms reduce the agency costs of external debt financing and therefore increase the use of debt
(bank) financing.49 Savings banks may also have boosted the use of debt financing. In addition,
the German pension system, which allows employees’ pension assets to be retained on the
companies’ books as capital, and enables hidden reserves to be built up, reduces the need to
approach the capital market. Hence, the optimal level of debt is higher and (external) equity is
less important in Germany, which is also reflected in the stock market. However, this mainly
holds true for established firms for which debt and internal funds are possible sources of
financing. They are not real alternatives for risky start-ups seeking external financing.
The ease of retaining funds and the German pension system resulted in a situation
whereby large amounts of financial resources were allocated inside the firm rather than in the
financial market. Hence, it is conceivable that large corporations that carried out innovations
internally crowded out, at least in part, the external financing of new ventures.50
Listings at foreign stock exchanges may be viewed as an alternative to a listing in
Germany. This alternative emerged in the 1990s when several venture-backed companies chose
this option (see footnote 57). It played no role before the 1990s.
48 The number of AGs in contrast to GmbHs is small and steadily decreasing. Moreover, only about 1/5 to 1/6 of all
AGs are listed, most others are subsidiaries rather than independent firms. (Kübler, 1999, p. 161.) With the
introduction of the „kleine AG“ some of the legal requirements were reduced to make the AG more attractive for
small firms. But the relaxations do not apply if a firm is listed.
49 See Elsas and Krahnen (1998) and (2003) for a discussion.
50 The German pension system may have another detrimental effect on stock markets. Strong pension funds as
capital market participants may potentially be beneficial for other market participants as well.
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