anything-lower than comparable measures in other industrialized countries.13 This is in line with
the argument that initial returns stem from asymmetric information about the quality of the firm
to be listed: The age of firms and their successful business history at the time of their listing in
Germany arguably result in a lower level of asymmetric information and therefore in a lower
initial return. Higher initial returns often stemmed from smaller and rather unknown companies,
which went public on the Geregelter Markt or the Freiverkehr during the 1980s.
The average initial return for IPOs on the Neuer Markt between March 1997 and December
2001 was 49.81%.14 This level seems to be very high. But while the average underpricing
between 1991 and 1995 at Nasdaq was only 13.8% (Habib and Ljungqvist, 2001), the average
underpricing in the US increased to 65% during the internet bubble in 1999 and 2000 (Ritter and
Welch, 2002). According to Loughran and Ritter (2002) some of the increase can be explained by
changes in the risk characteristics of the firms going public in this period. But they attribute much
greater importance to the possibility of allocating proceeds from IPO underpricing to “friends and
families” when bookbuilding is used.
The evidence indicates that the level of underpricing in Germany is not particularly high.
This is surprising as one might have expected the small number of IPOs, and thus the banks’
limited IPO experience as well as the high concentration in the market for lead underwriters to
have resulted in a higher level of underpricing than in other countries. Hence, the low level of
IPOs in Germany is unlikely to stem from higher direct or indirect costs of listings. Other
potential reasons for the low number of IPOs in Germany are discussed in section 4.
3. Venture Capital Financing in Germany
Development of the German Venture Capital Market
Before turning to the development of the German Venture Capital market it is important to note
that in Germany the use of the term “venture capital” differs from that in the Anglo-American
literature. Whereas in the Anglo-American literature “venture capital” is typically used in the
sense of early-stage and expansion financing, the German understanding of “venture capital” is
13 For surveys see, e.g., Loughran, Ritter and Rydqvist (1994), Ritter (1991), Jenkinson and Ljungqvist (1996).
14 Franzke and Schlag (2002). See also Kiss and Stehle (2002) for an analysis of underpricing and long-term
performance of IPOs at the Neuer Markt.