for the initial success of the Neuer Markt was stricter disclosure rules (Johnson, 1999, Kukies,
2000, Bottazzi and Da Rin, 2002) at least challenges the perception that disclosure requirements
deterred owners in Germany.
5. Conclusion
The evidence of the low number of IPOs is particularly surprising in light of the active stock
market that Germany witnessed before the two world wars (see footnote 1). Moreover, universal
banks in Germany were very active in securities underwriting at that time.61 Understanding the
reasons for this difference is important. Rajan and Zingales (2001) argue that the level of
openness of markets (cross-border trade and capital flows) influences “interest groups” incentives
to oppose the development of the financial sector. Their empirical evidence supports this
argument and, indeed, after reunification German became a net importer of capital and there was
a dramatic increase in capital flows (Leuz and Wüstemann (2003)). This suggests that the
phenomenon of the Neuer Markt may not only be an episode but is the result of an increased
openness of the market as measured by the level of cross-border trade and capital flows, which
reduces the incumbent’s benefits from resistance.
The argument that the low number of IPOs and venture capital financing in Germany might
be the result of incumbents protecting their interests may lead to the conclusion that it hindered
economic development in Germany. This conclusion may, however, be too hasty. Wurgler (2000)
provides evidence that the German financial system did not prevent an efficient allocation of
capital in the years 1964-92. Covering 65 countries and 28 industries, he finds Germany to have
the highest elasticity of industry investment to value added, with UK and US ranked 10th and 13th
respectively. Indeed there were times when the Anglo-American world looked jealously at the
German house bank system as a system that allows for long-term investments and interpreted it
as a source of stability. The low number of IPOs and the lack of competition from outsiders (in
particular independent investment banks and new firms) may have protected this system and
made it possible to value implicit contracts.62 In other words, the “backwardness” of the stock
market may have been an integral part of the German financial system, which was advantageous
61 See Fohlin (1999, 2000b) on universal banks in pre-WWI Germany.
62 For example, Petersen and Rajan (1995) provide evidence that strong credit market competition is detrimental to
lending relationships and may tighten the capital constraint of small businesses.
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