Has There Always Been Underpricing and Long-Run Underperformance? - IPOs in Germany Before World War I

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Abstract
This paper provides empirical evidence on initial returns and long-run performance of initial public offerings (IPOs) in Germany before World War I. In the literature it is often argued that a check for the robustness of existing results should be undertaken using different data sets and periods of analysis. We contribute to this ongoing debate by investigating the pricing and long-run performance of IPOs over a very different sample period. To shed light on the IPO market before the two world wars, we use a unique data set of 182 IPOs from twelve different industry sectors on the 'historic' German capital market, collected on six German stock exchanges over the period from September 1884 to May 1914. Performance calculations are made on the basis of monthly stock returns, also collected at the Center for Financial Studies in Frankfurt. Considering practices and the institutional setting on the German stock market before World War I, our findings indicate that there is significant underpricing, and using a mixture of distributions we also find evidence in favor of price stabilization for IPOs. Concerning long-run performance, initial subscribers of IPOs earn significantly higher returns than investors in the industry index for holding periods up to two years. Investors who bought their shares in the early after-market and held them for more than three years, however, experienced significantly lower returns than the respective industry as a whole. These findings correspond closely to what can be observed on global capital markets today. Finally, we find that underpricing of IPOs has significantly decreased over time in our sample, which may be due to a new securities exchange act that was passed in Germany in 1896, restricting issuers as well as underwriters and regulating essential issues of the process of going public.