for German firms.57 As a consequence, banks started to expand the fee-based business with
securities, insurance, investment funds in general and in investment banking for large banks in
particular.58 Interestingly, a similar development could be observed in the US in the 1920s when
the commercial banks, concerned about “disintermediation” due to the loss of some of their
traditional lending business to the public market, expanded their investment banking activities
(White, 1984, and Kroszner and Rajan, 1994).
Banks’ incentives are important because they play a major role as an intermediary in the
equity market: they advise firms as well as investors and organize the institutional framework.
Nevertheless, several other factors certainly also influenced the increase in IPO activities in
Germany after 1980. We shall only mention the most important ones here: a new tax regulation
which permitted the deduction of IPO expenses as business expenses in 1983; the introduction of
the Geregelter Markt with its more transparent pricing process in 1987; increasing stock prices at
the beginning of the 1980s; the successful IPO of Deutsche Telekom with an unprecedented
marketing campaign; increasing stock prices in the 1990s; the introduction of the Neuer Markt
with its new listing requirements and improved transparency aimed to attract firms for which
there was general hype based on new technologies and business opportunities.
Discussion
The preceding subsection discussed potential reasons for why there were so few IPOs in
Germany. One may ask which is the most important reason. However, discriminating between
different factors is difficult. In fact, they are mutually reinforcing and complement each other. As
an example, take the last argument about banks’ interests. It may be asked whether the banks
really had sufficient power to pursue their interests in such a potentially important and far
reaching issue, and why was there no opposition? It seems that the interest of banks could only
have an effect because legal impediments reduced participants’ interest in the stock market,
established firms had alternative sources of financing, legal rules restricted entry into investment
banking, and incumbents benefited from reduced competition and did not strive for change.
57 In 1995 and 1996 more than 90% of the VC-backed IPOs took place at a foreign stock exchange (the absolute
number is 28). The percentage decreased to about 20% after the introduction of the Neuer Markt, 1997-2002
(BVK Statistik 2001 and 2002).
58 See, e.g., Deutsche Bundesbank (1998), p. 43.
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