for IPOs being routed through the banks that make up the underwriting syndicate. The syndicate
buys the stock at a fixed price and sells it to the market. Since 1995 book building has become
the common method. It was first used on a larger scale for the Deutsche Telekom IPO in 1996.
The costs of going public comprise direct and indirect components. Examples of the first
type are the underwriting and the listing fees. The average direct costs are between 5% and 10%
of the IPO volume, depending on the size of the IPO, the risks involved, and the complexity of
the chosen IPO mechanism (Schürmann and Korfgen, 1997, p. 180, and Kaserer and Kraft,
2003). The direct costs for listing at the different segments vary, but the differences hardly
influence the choice of segment, and they are not much higher in Germany than in other countries
so that they should not impede IPO activity (Fischer, 2000).
From the perspective of the former owners, underpricing or initial returns constitute the
indirect costs of going public. Initial returns are generally defined as the percentage increase,
accruing to investors in IPOs of common stock, from the offer price to a closing market price
shortly after public trading begins.9
The level of underpricing in Germany is comparable to that in other countries. The average
underpricing in the years 1960 to 1995 was between 10% and 32%, depending on the market
segments, the time period, and the sample size:10 The average initial return decreased over time
(Stehle and Erhardt, 1999, p. 1399) and the number of cases in which the initial return was
negative increased.11 In addition, higher initial returns are observed in hot markets (Jenkinson and
Ljungqvist, 1996, p. 33).
When looking at the single market segments it becomes apparent that the average
underpricing of firms in the Amtlicher Handel was lower than for other segments. Between 1987
and 1995 it was about 8%.12 Thus, the average initial return at the Amtlicher Handel was-if
9 In the literature, the definition of initial return varies with respect to the methods of measurement, but of course
they all deal with the difference between the issuing price and the stock price in the secondary market. The length
of this period varies from study to study, with one day to several weeks being the usual time frame.
10 Some studies, for example, exclude the 10 firms for which the Portfolio Management GmbH was the underwriter
in the mid of the 80s. (The Portfolio Management GmbH is discussed in more detail in section 4.) The average
initial return of these IPOs was 67%. Seven of these companies failed after only a few years. Excluding these
companies reduces the average underpricing by 10% to 15%. See Stehle and Ehrhardt (1999) for a survey on
IPO-underpricing studies in Germany, which includes Schmidt et al. (1988), Uhlir (1989), and Ljungqvist (1997)
among others.
11 During the period from 1983 until 1988 only 13% of the IPOs where overpriced. In the years from 1988 until
1992 this number rose to 21% (Kaserer and Kempf, 1995, p. 55).
12 Stehle, Ehrhardt, and Przyborowsky (2000), table 1.